Buying & Selling a House with a Section 106 Agreement

A Section 106 property is one that has a ‘restrictive covenant’ in place which includes certain caveats to buying and selling it. These have been agreed with the relevant local authority and, in many cases, relate to it being an ‘affordable home’.

While this may sound complicated, lots of mainstream lenders offer this type of mortgage, so getting one should be fairly straightforward. In this article, we’ll look at how Section 106 legislation impacts property purchases and why speaking to a broker can make sure the process is smooth and hassle-free.

Can you get a mortgage on a Section 106 property?

Yes, it’s possible. There are plenty of lenders willing to loan you the money to buy this type of property, although which is right for you will depend on the mortgage provider’s criteria and the exact wording of the covenant.

Often, the benefit of buying a Section 106 property is that you get it under market value. This can make the process slightly longer and a little more complicated which puts off some lenders. This is why some borrowers face difficulty in finding a mortgage – particularly if they go it alone or just stick to mainstream lenders.

Possible restrictions

The restrictions on a Section 106 property are often put in place to ensure that, wherever possible, it is sold to the right type of buyer as agreed prior to construction by the developer and local authority.

Typically this is for local families or key workers in areas where property prices are prohibitively high, but it can relate to other property types, for example, holiday homes that can only be occupied for a certain amount of time each year or can’t be used for residential purposes.

Another possible caveat is a ‘resale price covenant’ that states a property must be sold at a discount if bought by a first-time buyer.

Restrictions are agreed locally, not nationally, which means they are handled differently in different parts of the country. For this reason, some mortgage providers place a blanket ban on this type of mortgage.

What are the deposit requirements?

Those who do accept applications may insist on a bigger than average deposit or higher interest rate to compensate for the additional work involved. However, there are non-mainstream lenders who specialise in this type of property and don’t put such restrictions in place.

Some providers are put off by covenants with no time limit as they worry about the resale value. To counter this, lots of covenants include a ‘cascade mechanism’ which ensures that, should it cause problems selling the home, the restrictions can be gradually relaxed to attract buyers.

In most cases, a deposit of at least 20% (of the reduced valuation according to the Section 106) will be necessary.

How a broker can help you get approved

Section 106 legislation can appear complicated to borrowers but is part of what many mortgage brokers do day in, day out.

We work with mortgage brokers who specialise in this type of mortgage and will be able to very quickly review the covenant on the home you’re buying and identify the most suitable lender.

If you get in touch we’ll arrange for a broker who has experience dealing with mortgages for this particular type of property to contact you directly.

Which lenders offer mortgages on this property type?

Mainstream lenders that will potentially lend on Section 106 properties include:

• Halifax
• Nationwide
• Santander (applications only accepted via a broker)

There are also several other banks, building societies and specialist lenders that will accept applications.

Each lender has their own criteria but, broadly speaking, the following restrictions included in the covenant should not prevent you from getting a mortgage:

• Salary restrictions
• Restricted percentage below market value
• Limitations on the category of occupant

Some lenders will approve a maximum loan amount of £250,000. Most will not accept applications for property tied to agriculture or where occupancy is restricted to maximum time limits throughout the year.

Get matched with a Section 106 property specialist

The best route to the best deal on a mortgage for a Section 106 property is to speak to an independent expert.

If you’re considering buying a property that has a restrictive covenant in place, our broker matching service will pair you with a Section 106 property specialist to ensure you get the right rate with no hassle.

Call today on 0808 189 0463 or enquire online to arrange a free, no-obligation chat with an expert.