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Buying a House With a Deed of Covenant

The key information you need to know before buying a property with a deed of covenant.

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By Pete Mugleston  | Mortgage Advisor Pete has been a mortgage advisor for over 10 years, and is regularly cited in both trade and national press.

Updated: 25th June 2019 *

We get lots of enquiries from people want to own a home with a covenant but are unsure about what they are and how it can affect their mortgage.

Many borrowers come to us unaware that owning the property does not necessarily mean that they can do with it as they choose with it, as there may be restrictive terms that come with a covenant.

Mortgaging a property with a covenant shouldn’t be stressful. To give you the key information you need, we’ve created this guide including:

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What is a covenant when buying a house?

A covenant is written on the contract or the mortgage deeds to a property and is essentially a promise which restricts the use of the land. This could include a permanent easement of access or restrictions of use to future owners of the property.

In some cases, land owners will arrange a private agreement with each other to restrict the use of the land in some way to benefit each other.

The agreement is placed in the title deeds to the property and not the parties personally. So if the current landowners sell their land in the future, the agreement or covenant is binding and continues.

What are the disadvantages of buying land a property with a restrictive covenant?

Buying land with restrictive covenants can cause some issues for the purchaser, especially those that wish to build  on the plot.

Buying an ex-council house with covenants

This can sometimes be the case when buying an ex council house with covenants which can be frustrating for homeowners that plan to renovate or make alterations. These might include building an extension or even simple changes like adding a satellite dish to the side of the house.

Buying land with a covenant

Some covenants control the activities that take place within the boundaries of the land which again can cause problems, especially if the covenant restricts noise or building activity at certain parts of the day or night.

As well as this, there are covenants that can even prevent trades or businesses from operating on the land.

Local authorities may insist that developers build some affordable housing which has to be sold at a percentage of the market value in perpetuity, so that affordable housing is always available.

There may be a requirement that a buyer has lived in the area for a period of time prior to purchase.

There are many different types of covenant and the above is not an exhaustive list.

Can a covenant restrict where you build?

Yes, some covenants may have conditions regarding not building on certain parts of the land. Therefore, the new owner of the land would have to get permission from the person having the benefit of the restrictive covenant.

This can sometimes cause dispute and even result in the covenant being enforced by the courts.

Therefore it is vital that you check your property’s covenant when buying land, to ensure you understand the conditions that come with it and how this can affect your property.

What happens if you breach the covenant?

If you are considering buying a property with a covenant, it’s important that you respect the agreement and do not carry out any work or breach the terms of the contract.

If you do, you could potentially face a claim in damages for the breach in addition to any injunctions granted.

How can you protect yourself against a covenant?

If you are affected by a restrictive covenant, you may be able to seek declaration from the Lands Tribunal that the covenant is invalid. This can be an expensive and lengthy process, so it may be cheaper to protect yourself against the costs you may face in any attempts to revoke the covenant.

This is known as Indemnity insurance.

Indemnity insurance

There are many providers of Indemnity insurance but if your property has non-standard construction such as an eco-home or a listed building, you may find it a little trickier to obtain.

This is because unique or more complex structures can bring a whole host of problems with them including strict material and craftsmanship requirements which can be expensive.

Therefore, if something were to go wrong, the cost for the insurance company to repair the property could be very high.

This is why some insurance policies do not cover certain types of buildings and those that do, may charge higher premiums, but that doesn’t mean finding a favourable deal is impossible. Make an enquiry to speak with an expert about this.

How could a restrictive covenant affect a mortgage?

You may find that the choice of lenders is more limited when it comes to mortgages for homes with covenants as their restrictions can affect sale-ability. This presents a risk to the lender who may have to sell it in the future is they have to repossess.

Because of this, you may be asked for higher mortgage payments as well as a larger deposit needed to secure the mortgage.

However, there may be specialist mortgage lenders that are happy to lend on a property with a covenant as long as you pass their affordability checks.

Make an enquiry and we’ll refer you to one of the experts for the right advice.

FAQs

In this section, you’ll find the answers to some of the questions we hear most frequently about covenant mortgages.

What is a personal covenant?

A personal covenant in a mortgage relates to a promise or agreement that the borrower will pay their mortgage repayments to the lender on time.

If the mortgage falls into arrears, this would be a  breach of the terms of the mortgage deed which can lead to the lender suing the borrower.

How can you find out where the benefit of the covenant resides?

A mortgage advisor can help you source where the ‘benefit of the covenant’ resides, although this is usually with the current land owner. In some cases, however, it may have or passed onto another individual or private company.

It’s important to know this as they will be responsible for enforcing any breaches or answering any queries or applications.

Should I seek professional advice?

Yes. It can be really helpful to have an expert examine the property deeds thoroughly so that you are aware of any covenants before you close the transaction, as once you sign the deeds to the property, you will be held accountable for any breaches of the contract.

As well as this, the experienced specialists we work with have access to hundreds of lenders across the UK and will know the covenant mortgage companies to approach. This can speed up the process for you and help prevent unnecessary rejections on your credit file.

Speak to an expert today

If you have questions about new construction loans or want to speak to an expert for the right advice, call Online Mortgage Advisor today on 0808 189 2301 or make an enquiry here.

Then sit back and let us do all the hard work in finding the broker with the right expertise for your circumstances.  – We don’t charge a fee and there’s absolutely no obligation or marks on your credit rating.

Updated: 25th June 2019
OnlineMortgageAdvisor 2019 ©

FCA disclaimer

*Based on our research, the content contained in this article is accurate as of most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The info on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs. Some types of buy to let mortgages are not regulated by the FCA. Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.