Whether you are buying a home for the first time, or you are an experienced homeowner, there is so much jargon to contend with when you are hunting for a new home, that you can be forgiven for not completely comprehending all of the property related terminology. Two of the most commonly misunderstood terms is “leasehold” and “freehold”. In this article we hope to demystify these terms and provide you with the knowledge you need to make the right choice for you and your family, let’s explore leasehold vs freehold:
What is a leasehold property?
Let’s start by defining what a leasehold is and how a leasehold works?
A leasehold property is one where the owner has possession of the property but not the land that it has been built on. As the owner of a leasehold property, your ownership rights are only valid for a certain period of time, the length of time is based on the length of your lease. Once the lease expires, the property is owned by the freeholder.
Which Properties are Leasehold?
The majority of houses in England and Wales are freehold while flats are usually leasehold. Most leases are long-term and usually last between 90 and 120 years.
What happens at the end of a leasehold agreement?
You can either ask the landlord to extend the lease or the full ownership of the property and the land is passed on to the freeholder.
But there are other scenarios too.
You may come across houses turned into flats that are popularly sold with shared freehold rights as there are several owners of properties on the same land. This is known as “a share of freehold”.
Difference between leasehold and freehold
Freehold and leasehold are the two main types of properties that individuals can purchase in England and Wales. We’ve already looked at leasehold but what about freehold?
Freehold property is the variation we are all most familiar with. Owners of freehold properties own both the building construction and the land that it sits on. As the owner of a freehold property, you hold responsibility for keeping the property in good condition and taking care of its maintenance. In other words, the owner of such property enjoys full ownership and can use the land in any way they please, as long as it’s in accordance with local regulations.
On the other hand, as we already mentioned, owning a leasehold means that you are in possession of the property on behalf of the freeholder and pay a certain fee or ground rent during the duration of the lease.
Why would you buy a leasehold property?
There are a number of reasons why a buyer would prefer to invest in a leasehold property.
- A cheaper investment – Normally, leasehold properties are cheaper considering that you are not purchasing the land underneath the property. In fact, often, buying a leasehold turns out to be less expensive than renting the property. This is especially true for those in search of a home in expensive parts of a city.
- More financing options – The fact that the value of leasehold properties is significantly lower than that of freehold properties also has implications for financing. The buyer may sometimes have the option to acquire the property and the land and pay a lower annual fee in comparison to the rate of a mortgage payment. Although there are options to choose from, property agreements are different every time and it is advisable to seek appropriate legal advice.
- Less commitment – There is a certain level of commitment involved in owning the land underneath the property. By investing in a leasehold property, you’re exempt from such responsibilities.
Disadvantages of buying a leasehold property
But buying a leasehold property is not all good. There are also a number of disadvantages that you should be aware of before making your decision.
- You have to pay ground rent – Owning a leasehold property requires you to pay ground rent on an annual basis to the landowner of the property.
- Ground rent may change – Just because the ground rent for the leasehold property you’re about to invest in today is a certain amount it doesn’t mean that it won’t change over time. Often, the ground rent increases at certain time periods during the lease. This may be every 10 years, 20 years, or at other periods of time.
- Higher deposits required – In most cases, you will be asked to pay a higher deposit for a leasehold property in comparison to freehold ones. This may mean that it’s a challenge to find financing as the requirements are more complicated than usual.
- No advantages from a change in land value – If the land under the property increases in value, there will be no added benefits for you as the owner of the leasehold estate.
- More restrictions – As a leaseholder, you are not authorized to make any changes or major renovations to the property unless you’ve received permission from the freeholder. You could also be restricted when it comes to having pets in the property and you could be asked to vacate the property if you don’t pay your fees on time.
Hopefully you now understand the differences between a freehold and a leasehold property. If you still have a few burning questions, here are a couple of the most popular queries we are asked when it comes to considering leasehold properties:
Can you get a mortgage on a leasehold property?
You can get a mortgage on a leasehold property but it may be difficult if the remaining lease is for a time period of less than 70 years. Most lenders are interested in seeing it run for around 25 or 30 years after the mortgage has been repaid.
Can a leasehold property become freehold?
You might have the opportunity to buy the freehold rights to the property. This process is called “enfranchisement”. It would all come down to whether you own a flat or a house as there are certain laws related to the matter.
If you have a specific query regarding leasehold or freehold properties, why not have a chat with one of our local property experts. Each of our offices have unrivalled local property knowledge and they will welcome your enquiries.
