If you're thinking of buying a property, you might be weighing up which property tenure is best for you.
You might want the autonomy that comes from owning a freehold, or reduced responsibility for maintenance that comes with a leasehold.
Or, perhaps you're interested in buying a new build, but don't really know what it means to buy a leasehold.
Below we compare freeholds vs leaseholds: what they are, how they differ, and whether 'leasehold' should stop you buying a property.
A leasehold is a type of property tenure. If you own a lease, you have permission to live in and use a property for a set amount of time, but you don't actually own the property or the land that the building is on.
The land, and any communal areas in the building are looked after by a ‘freeholder’. If you live in a leasehold property, it’s likely that you’ll have to pay ‘ground rent’ to the freeholder who owns the land your building is stood on. You may also have to pay a ‘service’ or ‘management’ fee, as a contribution to the upkeep of the communal areas in the property.
Usually leases last between 99 and 125 years, but there are some leases that last as long as 999 years. Once your lease expires, your property returns back to the ownership of the freeholder.
Like a leasehold, a freehold is a type of property ownership. However, if you own a freehold you own: the property, the land it stands on, and even the air above the property (up to about 500 feet). You own this indefinitely - meaning you have the legal right to the property and land until you (or your inheritors) decide you want to sell.
‘Freeholder’ is the name given to someone who owns a freehold. It’s usually used in relation to a freehold owner who leases out property on their land in the form of leaseholds. But it can actually be used to mean anyone who owns land or property on a freehold basis. If you’re a freeholder, it’s your name that features in the Land Registry, as the owner of the ‘title absolute’.
There are a number of differences between freeholds and leaseholds. Perhaps the biggest difference is in the amount of time you’re allowed to stay in the property. If you’re a leasehold owner, you only have the right to live in the property for a set length of time. You're basically a long term tenant.
The amount of time you will 'own' the property for will be detailed in the terms of your lease. It'll usually be between 99 and 125 years, but can sometimes be significantly shorter.
On the other hand, if you own a freehold, there’s no time restriction on your ownership of the property. You own the building and the land it stands on outright, and indefinitely.
This brings us to the second most important difference - what you actually own. As a freeholder you own absolutely everything within the legal boundary lines of your property. From the ground the building stands on, to 500 ft above the property. Technically you also own the land underneath your property too, but it’s never actually been legally determined how far down you’d be allowed to dig.
In contrast, if you own a leasehold, you don’t technically own the property nor the land, rather you own the permission to use it for a set amount of time. If you want to make any changes to the building - like get an extension, or replace windows - you will have to get permission from the freeholder first.
As a leaseholder you may also have to pay 'ground rent' to the freeholder for permission to reside on their land.
This amount can vary hugely, and it's almost completely at the freeholder's discretion. In some cases this amount is 'a peppercorn' - which means you don't actually have to pay anything, but you contractually accept the freeholder's ownership of the land. In other cases the ground rent can be a significant cost.
Technically a freeholder can double the ground rent every 10 years. If they decide to do this, the rent a leaseholder has to pay can rapidly mount up.
It’s fairly common for flats to be sold on a leasehold rather than a freehold basis. The freeholder will look after the communal areas of the flat building, like the stairwells and gardens, but each of the flats will be sold separately on a leasehold basis.
This model came about as a way for developers and property investors to make more money. By selling the properties on a leasehold basis they get additional income from 'ground rent', and can sell the flats again once the leaseholds run out. Because of this, most flats, and almost all new build flats are sold as leasehold properties.
But you may find a rare exception. Occasionally, you'll find flats sold on a commonhold basis - which is essentially half way between freehold and leasehold. Each resident owns a share of the freehold, and collectively manages the communal areas of the property together.
In contrast most houses are sold on a freehold basis. This is because there's usually only one house on a plot of land - unlike a whole block of flats. However there is a growing trend for newly built houses to be sold on a leasehold basis. This is because selling leasehold properties is an effective way for developers to increase their income. If you're interested in buying a new build property, make sure to check whether it's being sold as a leasehold or a freehold before you commit!
According to the Homeowners Alliance, when it comes to deciding whether to go with freehold vs leasehold, ‘the difference can be between a home that is worth buying and one that isn’t’.
Certainly there are some disadvantages to purchasing a lease - but whether that should put you off purchasing a leasehold home, depends on the particular terms of the lease, and the freeholder in charge of the property.
If you’re thinking about buying a leasehold, make sure you consider the following things:
The conveyancing process can be more expensive This is because the legal process for buying a leasehold vs buying a freehold is more complicated. It requires interacting with more people (the seller, the buyer, and the freeholder), and negotiating your responsibilities as a leaseholder.
The conveyancing process can take longer
Because the conveyancing process is more complicated, it also takes longer too.
When you purchase a lease, you buy the permission to live and use a property for a set amount of time. Once this time runs out, you will have to return the property to the freeholder. You can sell the property before your lease expires, however the value of a property declines as the length of the lease decreases - particularly once you get to about 70-80 years left.
Mortgage lenders can only give loans on properties that are worth at least the amount being asked for. Because the value of a leasehold decreases as the length of the lease shortens, banks can be reluctant to lend to buyers of short leaseholds.
Because it's more difficult to get a mortgage on a 'short lease' this can cause the value of your leasehold property to decrease even more - it's a self-fulfilling cycle. However, if you fulfil a certain number of conditions, and have the money available, you may be able to apply to extend your lease - which can significantly improve it's value if you decide you want to sell.
Freeholders are allowed to increase the ground rent at each 'review'. The frequency of 'reviews' will be noted in the terms of your lease - often it will be every 10 years. Increases can be as much as double your current rate, which can make owning a leasehold rapidly unaffordable.
Usually the freeholder will be responsible for the maintenance of anything structural or communal in your property - for example the roof or stairwells. If your freeholder is conscientious, this shouldn't pose a problem. But, if they are neglectful or distant, keeping your building in good condition can be a battle.
As a leaseholder you don't actually own the property, even if your lease is for 999 years. This means that you have to ask permission from the person who owns the freehold (the real owner) before you can make any big decisions. This could be anything from renovations, to renting your flat out, to getting a pet. Your lease will have all the specific details of what you can and can't do without permission. Make sure you check it thoroughly before making any decisions, or you might face financial and legal repercussions.
On the other hand if you own a freehold property, you have the sole responsibility for maintaining every aspect of it. It's up to you to consistently maintain the condition of your home - and if anything goes wrong you have to pay for it.
When you own a leasehold, each leaseholder in the building pays a service charge. This amount is then collectively used to maintain the property.
In most cases it's not too hard to get a mortgage if you're buying a leasehold property. Your chosen lender will take into account the length of the lease, as well as any service charges or ground rent you might be liable for, alongside their regular affordability checks.
If you're buying a property with a short lease, it'll be much more difficult to get a mortgage. This is because the value of a leasehold property declines as the lease shortens, and banks need to be confident that the lease is worth the amount you need to borrow. They'll also take into account the fact that it's more expensive to extend a lease the shorter it is.
When it comes to mortgages, a short lease is usually classed as anything under 80 years. Some lenders might consider a lease of 70 years, but your options will be quite limited, and you may end up paying a very high interest rate.
In some cases you may also find it more difficult to get a mortgage on leasehold properties, if the bank does not agree with the terms of the lease. For example, some banks will not give mortgages on properties with very high ground rents or service charges.
For example, in 2017 Nationwide - the UK's largest mortgage lender - became the first bank to refuse to lend when it considers the terms of the lease to be unfair. In order to qualify for a leasehold mortgage with Nationwide, your lease must be long; the ground rent must remain reasonable during the lease term, and it must only increase if it's linked to a verified index. These terms ensure that your property remains affordable for the entirety of the mortgage term.
These terms and conditions mean that it can be a bit trickier to get a mortgage on leasehold properties. However, if the terms of the lease are fair and affordable, you shouldn't have an issue in securing a loan.
The general rule is the longer the leasehold, the better. This is because the longer the lease has left, the more valuable it is. You'll need the leasehold to last at least 21 years for it to be considered valid for extension in the future. And, if you're looking to get a mortgage, having at least 80 years left on the lease is vital.
In terms of value and security, having a lease of 999 years, may feel pretty much like you own the property. You'll be able to get a mortgage, sell your property, or pass it on to your children, much like with a freehold.
However, having a super long leasehold is not the same as owning a freehold. You still do not legally own the property. This means the freeholder is able to charge you ground rent and service charges at increasing rates, and you'll have to ask them permission to do things to the property that you would normally have autonomy over. For example, if you wanted to do any renovations, or get a pet, you'll likely have to ask permission from the freeholder.
As a leaseholder you'll also have less control over the condition of the building, the garden, and any communal areas. It's the freeholders responsibility to maintain these areas.
The exact details of who's responsible for what, will be listed in your lease. Usually leaseholders will be responsible for anything inside their flat, and freeholders will look after anything structural or communal. Leaseholders will have to contribute to any costs the freeholder incurs when making repairs.
If you have a diligent and caring freeholder, it's likely you won't have any issues. But, if your freeholder is absent or neglectful, your options are more limited.
If your freeholder refuses to carry out any vital repairs that they are responsible for, you can take them to court for breaking the conditions of your lease agreement. The court can force them to do the work, and may make them pay compensation to you too. But, the court process can be lengthy and costly, and can be extremely stressful.
If you're thinking of buying a property with a long lease, take into account the difference of freehold vs leasehold, to decide whether it's actually the right decision for you.
Yes, in some instances it is possible to extend the lease on a property. If you can afford to, extensions can be pretty beneficial. They increase the value of your property, and allow you to renegotiate some of the terms of your lease, such as: the rate of ground rate, and who manages what in your building.
Usually to extend the lease you will have to fulfil some conditions:
The actual amount the extension will cost can vary dramatically. Make sure to arm yourself with a good legal representative, who has specific experience in dealing with leaseholds. They'll be able to help you navigate all the various terms and legal hoops you have to jump through.
Note: after the lease gets to about 70 years left, the cost of extending the lease dramatically increases.
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