Published 26th November 2021 · Updated 5th August 2023 by Martin Alexander
Applying for a mortgage on a property with a deed of covenant is far from straightforward, as covenants may impose restrictive terms.
Although mortgage lenders accept properties with covenants, they’ll still require details of what the covenant entails. For this reason, mortgages with restrictive covenants are assessed on a case-by-case basis.
This is because some covenants can restrict the property to such an extent that it may affect the value of the home. This can then have a negative effect on your application.
What is a deed of covenant when buying a property?
A deed of covenant is a legally binding deed in which the homeowner agrees to the obligations and terms of the covenant.
Covenants ensure that homeowners comply with the terms of their property. Agreements are placed in the mortgage deeds to your home and aren’t attached to you personally.
It’s also important to note that some covenants can have a positive effect on your living arrangements, whereas others can be restrictive.
Positive covenants
Positive covenants typically carry obligations that have a positive outcome. As a result, it’s often easier to get a mortgage with a positive covenant.
Examples of positive covenants include:
• Expenditure on improving the property
• Repair or maintenance
• Building boundary fences
Restrictive covenants
In comparison, restrictive covenants restrict the use of land. Restrictive covenants can make mortgage approval difficult.
Examples include:
• No alterations to the property without consent
• Not to park certain vehicles on the land
• Not to erect satellite dishes
• Prevent certain trades on the land
• Limitations on the type of animals that can be kept at the property
• Restrictions on where you can build
Can I get a mortgage with a restrictive covenant?
Yes, getting a mortgage with a restrictive covenant is possible, but it depends on the covenants attached to the property.
The lender you’ve approached will also affect whether you’re approved. Depending on the conditions of the property, some lenders will be better suited than others.
The main reason lenders are cautious with mortgages involving covenants is because of the legal obligations that are attached to the property. Certain covenants can affect property values, which can make them high-risk propositions.
Disadvantages of buying a property with a restrictive covenant
• Unable to build on the land
• Could be restricted on how you renovate the property
• Extending the property could be an issue
• May find it harder to get a mortgage
• Selling the property could prove difficult
Your conveyancer will also discuss your restrictive covenants in more detail. This will give you an idea of your exact legal duty so you can make a more informed decision.
Which mortgage lenders accept restrictive covenants?
If you’re buying a property with restrictive covenants, your choice of lenders may be limited. This is because covenants have certain risks attached to them, and as a homeowner, you must abide by your legal obligation.
Properties with restrictive covenants are often harder to sell for this reason, so mortgages are harder to come by.
Lenders can charge higher rates and fees for a mortgage with covenants. You may even be required to put down a larger deposit.
The good news is that there are specialist lenders that design mortgages for this very purpose. A mortgage would be possible if you meet the rest of your lender’s criteria.
Buying land with a covenant
Getting a mortgage for land is very different from a property mortgage. If the land you’re buying has a covenant, then it could limit your mortgage options.
Most lenders require building consent for your land when you apply for a mortgage. If you have a covenant that restricts buildings of any type, you may struggle to gain approval.
It’s common practice for land buyers to gain planning permission before applying for a mortgage. This way, you can have confidence in the plot of land you’re buying if the covenants don’t restrict your plans.
Read more: How to get a mortgage on land
What happens if I breach a covenant?
If you have a property with a covenant, you must uphold the conditions in every aspect. This is because you have a legal obligation to do so.
Breaching a covenant can result in you facing fines for any granted injunctions.
Can I take indemnity insurance against a covenant?
At the time of buying your property, your conveyancer may offer you indemnity insurance to protect you from your covenant. That being said, indemnity insurance only applies to certain properties and not every covenant can be covered. Furthermore, the insurance cost could be high, which could affect your buying decision.
Some mortgage lenders may also insist that an indemnity policy is taken out, depending on the covenants attached to the property.
Can I remove a covenant from a property?
If you’re not eligible for an indemnity policy, you may be able to remove the covenant from the property.
It’s possible to remove a covenant if you can contact the person with the benefit of the covenant. This is done to obtain ‘retrospective consent’ for the work you wish to carry out. If this approach doesn’t work, you can apply to the Upper Tribunal Lands Chamber to try to remove or change the covenant.
Removing a covenant isn’t an easy task and certainly won’t provide you with a quick solution to mortgage approval. Removing restrictive covenants can even increase the value of the property. As a result, the seller may decide to increase the sale price.
Need more help?
If you’re still unsure about what to do next, you can speak to an expert mortgage advisor. Simply make an enquiry, and we’ll contact lenders on your behalf to check what’s possible.
Because you’re buying a home with restrictions, it’s important not to overpay because a lender is willing to accept you. There may be other lenders willing to offer you a mortgage at better rates. Searching the market can ultimately lead to being accepted for a mortgage with competitive rates.
Your conveyancing team will also give you legal advice on how your covenants will affect you. If your conveyancer feels the covenant will restrict you from achieving your goals, they may advise you against buying.
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About the author
Martin Alexander
Martin is a senior mortgage advisor who has held a CeMAP qualification for over 15 years while completing an MBA in Global Banking and Finance.