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Purchasing a Property with a Deed of Covenant

By Kev TilleyCeMAP

Last Reviewed: 6th January 2022

Restrictions imposed by a deed of covenant can negatively impact your mortgage application process. In addition, these limitations can affect the property’s value and make it challenging to resell.

This doesn’t mean mortgage lenders won’t consider properties with a deed of covenant, but they will require in-depth knowledge of what the covenant covers. It is more challenging to obtain a mortgage on a property with a restrictive deed of covenant than a positive covenant.

A restrictive covenant prevents the buyer from certain forms of usage or improvement without permission. Often permission is not granted, thus limiting the homeowners living arrangements which can prove frustrating. No one enjoys being told what to do in their own castle!

This very reason puts potential buyers off when purchasing a home governed by a deed of covenant, therefore making the resale of these homes somewhat tricky.

Additionally, when banks look to mortgage a home, they want the surety of a quick resale should the mortgage fail, something a restrictive covenant is sure to impede.

What is a Deed of Covenant?

This is a legally binding document (deed) which details certain obligations or restrictions to which the homeowner must adhere. A covenant is there to ensure that homeowners abide by their property terms.

These stipulations are attached to the property and not to the property owner personally. Therefore they apply specifically to the property and not to the owner.

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Types of Covenant

Covenants can be either positive or restrictive and can benefit or restrict your living arrangements.

  • Positive covenants

Usually, positive covenants benefit the property. As a result, these covenants don’t represent a risk to mortgage lenders, and mortgages are relatively easy to obtain.

Types of positive covenants include those that detail repair and maintenance, installing boundary fences, and financial outlay for property improvement.

  • Restrictive covenants

In contrast, restrictive covenants restrict land usage and make obtaining a mortgage challenging.

Types of restrictive covenants include but are not limited to alterations, satellite dishes, and building. They may also restrict the types of animals allowed on the property and prevent certain types of trade or vehicles from parking on the land.

Is it Possible to Get a Mortgage with a Restrictive Covenant?

Depending on the type of restrictions and lender you select, getting a mortgage on a property with a restrictive covenant is possible. That said, some lenders are more suited to this type of mortgage, so it’s best to do your research.

Often the legal obligations attached to the property are why lenders are more cautious with this type of covenant. This is because some restrictions can affect the property value and resale ability making them more high-risk.

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Disadvantages of Restrictive Covenants

When purchasing a property with a restrictive covenant, it’s best to discuss the restrictions with an experienced conveyancer.

This will help you understand your legal obligations towards the property. Some disadvantages of a restrictive covenant are detailed below.

  • Restricted property renovations
  • Reduced resale-ability
  • Prevented from building on the land
  • Unable to extend the property
  • Mortgages may be challenging to obtain

Do Mortgage Lenders accept Restrictive Covenants?

Buyers looking to purchase a property with a restrictive covenant will have limited choice in terms of mortgage lenders. This is because lenders view these properties as higher risk due to the obligations you as the homeowner will have to adhere to.

In addition, restrictive covenants make properties harder to sell, thus further impacting the buyers’ ease of obtaining a mortgage. As a result, lenders often charge higher fees and interest rates to mitigate the risk, and a larger deposit may be required.

Specialist lenders design mortgages specifically for this type of purchase, and provided you meet the lender’s relevant criteria, a mortgage may be possible.

Can I Breach a Covenant?

Legally you are required to uphold the conditions of the covenant. Should you breach the covenant, the courts can grant injunctions forcing you to pay penalty fines.

Can I Purchase Insurance against a Covenant?

This is called indemnity insurance and is usually offered when purchasing the property by your conveyancer. However, this type of insurance doesn’t cover every property type and covenant. In addition, the cost of the insurance can be high and further impact your purchasing decision.

You may find that your mortgage lender requests you to purchase indemnity insurance, but this depends on the types of restrictions imposed on the property.

Is it Possible to Remove a Covenant from my Property?

This can be challenging and time-consuming and won’t provide a quick mortgage approval. Removing a covenant requires contacting the person with the benefit of the covenant to obtain ‘retrospective consent.’

As a last resort, you can contact the Upper Tribunal Lands Chamber to try and have the covenant removed or changed.

One disadvantage of removing the covenant prior to purchase is that it may increase the property’s value and thus cause your purchase price to increase.

Is it Difficult to Purchase Land with a Covenant?

While land mortgages differ significantly from property mortgages, they are also impacted by land that has an attached covenant. Often this means the mortgage options are limited due to the restrictions imposed on the land, which affects the resale-ability.

When purchasing land, lenders stipulate that you obtain building consent at the point of applying for the mortgage. This assures the lender that the property has value and will resell easily if required. Therefore, if the covenant prevents you from building on the land, this may create a challenge when looking for mortgage approval.

Obtaining planning permission prior to applying for a mortgage is common practice, and as long as the covenant restrictions allow, you can build with confidence in the future.

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Purchasing a Property with a Deed of Covenant Final word

Purchasing a property with a deed of covenant may present particular challenges when looking for mortgage approval.

For example, it may inflate the interest rate on the mortgage, increase the deposit required and impose restrictions that you will be legally obliged to follow.

However, not all covenants are restrictive. So, before you cross covenant restricted properties off your wish list, discuss your options with a specialist mortgage advisor. They can assess your situation and your exact obligations regarding the deed of covenant.

Call us today on 01925 906 210 or contact us. One of our advisors can talk through all of your options with you.

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