When families borrow against property portfolios, the headline numbers, loan size, interest rate, repayment term—tend to take centre stage. Yet beneath the surface lies a web of conditions known as
loan covenants. These clauses, tucked into facility agreements, may never be mentioned in glossy marketing material but often determine the true flexibility and risk of borrowing.
For family-owned portfolios, covenants are especially important. They don’t just govern cash flow; they govern governance. Breaching a covenant can trigger penalties, higher interest costs, or even foreclosure, regardless of whether repayments are up to date.
In 2025, lenders are leaning harder on covenants to manage risk. That means families who once skimmed over the fine print must now understand it in detail. This blog explores the most common covenants in property finance, why they matter, and how families can avoid being caught out across generations.
What exactly are loan covenants?
Loan covenants are contractual obligations placed on borrowers beyond the requirement to make repayments. They typically fall into two categories:
- Financial covenants: ratios, tests, or thresholds the borrower must meet.
- Non-financial covenants: actions the borrower must (or must not) take, such as reporting obligations or restrictions on further borrowing.
In property finance, common covenants include
loan-to-value ratios,
interest coverage ratios, and
reporting requirements. They exist to reassure lenders that the borrower remains a safe credit risk, even as conditions change.
But in practice, covenants often outlive the family members who signed them. A clause agreed by one generation can bind the next—sometimes in ways heirs never anticipated.
Why covenants matter more in 2025
Several developments are making covenants especially significant this year:
- Higher interest rates mean interest coverage ratios (ICRs) are harder to meet, even for stable portfolios.
- Intergenerational transfers often bring in heirs less familiar with facility agreements, raising the risk of inadvertent breaches.
- Private banks and specialist lenders are relying on covenants as a substitute for traditional guarantees, especially in complex structures.
In short, what was once “just the fine print” is now centre stage in negotiations.
The most common covenants in family property finance
1. Loan-to-Value (LTV) maintenance
Most lenders require that the loan remain below a certain percentage of the property’s value. If valuations fall, families may be forced to inject cash or pay down debt—even if rental income still covers repayments.
This risk was particularly visible during recent market volatility, discussed in
Navigating UK Mortgage Options When Home Valuations Fall. Families without liquidity to restore LTVs quickly may face lender intervention.
2. Interest Coverage Ratios (ICR)
Lenders often require rental income to exceed interest payments by a fixed multiple (e.g. 125–145%). With higher rates in 2025, more families are failing these tests, even on long-held assets.
ICRs are particularly dangerous when calculated on a
portfolio-wide basis. Breaches on one property can drag the whole portfolio into default.
3. Cross-default provisions
These clauses mean that if a borrower defaults on one facility—even for a minor breach—other loans with the same lender can also be called into default. Families with multiple facilities across a lender’s network must pay close attention to these linkages.
4. Restrictions on new borrowing
Many covenants limit additional borrowing without lender consent. For ambitious families aiming to expand, these restrictions can slow growth or create tension when opportunities arise unexpectedly.
5. Reporting obligations
From annual accounts to quarterly rent rolls, many facilities demand regular reporting. Families that fail to provide information on time—even if accounts are healthy—may technically breach covenants.
6. Change of control clauses
If ownership or management changes (for example, when wealth passes to the next generation), lenders may require repayment in full. This is particularly sensitive for families without formal succession planning.
Example scenario: the silent breach
Imagine a family with a £10 million facility secured against a £20 million portfolio. The agreement includes an LTV covenant of 55%.
During a downturn, the portfolio is revalued at £17 million. Overnight, the LTV jumps to 59%, breaching the covenant—even though the family has never missed a repayment. The lender issues a notice requiring either partial repayment or equity injection.
Without liquidity, the family is forced to sell a property under pressure, crystallising losses. All because of a covenant clause that seemed irrelevant at signing.
Why covenants are tougher for families than corporates
Large corporates often negotiate covenants with entire legal teams, securing headroom and carve-outs. Families, by contrast, may sign standard terms without negotiation, especially if dealing with high street banks.
This leaves them more exposed. A family that views debt as “just another mortgage” may underestimate how aggressively a covenant can be enforced. Worse, heirs inheriting portfolios may be unaware of existing obligations until they receive a default notice.
That’s why, as highlighted in
Succession-Ready Estate Finance, families need to integrate covenant awareness into succession planning.
Strategies for managing covenants
Families cannot avoid covenants, but they can manage them intelligently.
- Negotiate upfront. Specialist brokers can often secure looser covenant terms than high street lenders, especially for families with diversified portfolios.
- Build headroom. Avoid borrowing to the maximum LTV. Leave space for valuation falls or rental voids.
- Centralise reporting. Families should create internal systems to ensure covenants are tracked and reporting deadlines met.
- Review at succession. When ownership passes, review all covenants to ensure heirs understand obligations.
- Consider private banks. These lenders may offer bespoke covenants tailored to family structures, though they may also demand stronger guarantees.
Lender perspectives
For lenders, covenants are not just about risk—they are about discipline. They reassure banks that families will maintain prudent leverage and engage in transparent reporting.
Private banks, in particular, see covenants as a way to align long-term relationships. They may waive strict LTV thresholds if broader wealth sits with them, but only if families maintain open dialogue.
Mainstream lenders, by contrast, are often less flexible. Breaches are more likely to trigger formal action, even if families are longstanding clients.
The intergenerational challenge
Covenants become especially dangerous when portfolios pass between generations. A covenant signed by a parent in 2010 may still apply in 2025, binding heirs who had no part in the negotiation.
This is why educating the next generation is critical. Families should create “covenant handbooks” as part of their governance—summaries of obligations, dates, and triggers—so heirs don’t discover terms only when problems arise.
The long-term view
Loan covenants may never be the most glamorous part of property finance, but in 2025 they are often the most consequential. Families that understand and manage them proactively can preserve resilience, secure favourable lending, and avoid crises.
The lesson is simple:
the fine print is not fine at all—it’s the framework that determines whether wealth endures across generations.
How Willow Can Help
At Willow Private Finance, we specialise in helping families navigate the hidden risks of property finance. That includes reviewing covenant exposure, negotiating flexible terms, and aligning borrowing with both lender expectations and family succession plans.
Because Willow is whole of market, we can compare lenders with strict covenant packages against those offering more flexibility—ensuring families get structures that support, rather than hinder, long-term growth.
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Book a free strategy call with one of our mortgage specialists.
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