Buying a house is a big decision. So, it’s important you have a good knowledge of the difference between freehold and leasehold before you sign on the dotted line.
There are pros and cons of each and the difference between the two could mean you either own your home outright or you have a landlord.
Generally, if you own a house it’s usually a freehold, while flats and apartments tend to be leasehold, although this isn’t always the case.
Houses, for example, might be leasehold if those living there have a shared ownership scheme.
Here we look at everything you need to know to make an informed decision.
What is leasehold?
If you buy a leasehold, you enter into a contract to own the property for a set amount of time.
This should be set out in the lease, along with any other conditions of the contract.
You’ll likely be responsible for maintaining the part of the building you own. While the freeholder should have the job of maintaining the common parts of the building, such as the:
In return for this, leaseholders pay maintenance fees to the freeholder. Annual service charges, and any home insurance costs might be shared between the leaseholders.
There might also be restrictions on the leaseholder such as not being able to sublet a room or own a pet.
The overall building, and the land it has been built on, belong to the freeholder, who is also known as the landlord.
When you buy a leasehold, the previous owner of the property usually passes ownership of the leasehold to you.
Leases don’t last forever, although they can last for as long as 999 years. In technical terms when one comes to an end the property then returns to the freeholder.
Although in practice they’re often extended. However, if you extend a lease you might have to pay the freeholder for this. And the less time left on the lease, the more expensive it could be.
A short lease term might also lower the overall value of the property.
If you want to extend a leasehold, there are some rules that apply. First, you need to have owned the property for at least two years.
If this is the case you then have the right to extend the leasehold by 90 years. This sounds like a lot, but most mortgages state that a property needs a lease of at least 70 years.
You also need to be what ‘s called a ‘qualifying tenant’. This means the lease must have been in place for at least 21 years when you bought the property.
Therefore, buying a property with a short lease could be a risky business. While you can extend the lease, this could cost you.
Similarly, if you plan to sell the property, you might want the current lease to last more than 80 years.
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What is freehold?
Freeholds tend to be a lot simpler to understand. If your home is what’s called a freehold, this means you own the entire property and any land it’s built on.
Owning a freehold is generally seen as the better option when looking at freehold vs leasehold. It does have its downsides though - as you own the property you are also the person responsible for it.
You need to make sure you keep it in a good condition and keep up with general maintenance of the property.
If you don’t, it could cost you in the long run when things inevitably deteriorate or break.
If the property is in a bad condition and in need of a lot of work this might also make it harder to sell.
Leasehold vs freehold
Now you know what leasehold and freehold mean, it’s time to look at the pros and cons of each to decide which is the best option for you.
How much will each cost?
One of the most important aspects when buying a property is the cost and this is especially important when considering leasehold vs freehold.
On the whole, buying a freehold property tends to be more expensive than a leasehold at the start.
This is because if you buy a freehold it’s usually a bigger property, as leaseholds tend to be flats rather than houses. A leasehold, as it’s usually a flat, should usually have a cheaper upfront cost.
You can’t just look at the initial cost when comparing the two. Before you buy, calculate all of the costs involved to make an informed decision.
With a freehold you’ be responsible for paying the mortgage as well as general maintenance costs to keep the house in a good condition.
But with a leasehold you might need to pay maintenance fees, ground rents, and a share of the home insurance policy.
You also might have to pay for administration fees with a leasehold property. These could be higher than for a freehold because the paperwork might take longer to organise.
It’s also fairly standard to contribute to a sinking fund. This is basically a rainy-day pot for any unexpected maintenance or repairs that need doing, such as a broken boiler or new roof tiles.
These fees are not always set in stone either.
Pay particular attention to things like ground rents when reading your property contract. And make sure the fee can’t change or be sold off to a third party.
Also make sure you’re aware who owns the freehold, if it can be sold, and check the limits on how much you can be charged.
There have been cases where homeowners have bought new build homes and thought they were the freeholder.
They later found out they were in fact a leaseholder and had to pay extra fees which increased when the freehold was sold on.
It‘s always worth asking how much more it would cost to buy the freehold. If this is less than all of the costs associated with a leasehold then it might be worth considering.
You might also have to pay if you need to extend the lease, so factor this into your overall costs if you think it will apply to you.
Timing is everything
When deciding between a freehold and leasehold, it’s important to look at the timings.
If you buy a freehold property, you’re in control of how long you own it for. If you want to sell the property, you can also decide when to do this.
However, with a leasehold property things are a little more complicated. The length of the leasehold is everything here.
The less time on the lease, the more the value of the property could fall. Trying to sell a property with a short lease could be tricky.
On the whole, experts agree that a lease should be at least 80 years when you buy the property. But they can be longer, or shorter, than this.
You could consider renewing the lease, which could increase the value of the property and give you more time to decide.
However, the cost of renewing a lease could be up to 20% of the total cost of the property, which could put a real dent in your finances.
Who’s in charge?
If you buy a leasehold, even though you own a property there might be restrictions on what you can do with it. If you make any structural changes to the property you might need approval from the freeholder.
There could be rules around other things too, like owning a pet or sub-letting one of your rooms out. These should all be outlined in the contract so read this fully before you sign.
However, living in a leasehold means if work needs to be done on your property it’s the freeholder who’s responsible for arranging this.
This could be for a new roof, for example or an exterior paint job. You might need to contribute to the cost though.
Owning a freehold, however, means you have total control over what you do with the property.
You can make any changes you want, as long as planning permission allows. And you don’t need to get permission from anyone else to do so, apart from the people living there.
You’re also completely responsible for the entire property, including arranging and paying for any work that needs to be done to it.
What extra benefits are included?
Leaseholds could be a great option for many property owners and often are a cheaper alternative to freeholds.
One perk is that you might have some extras thrown into a leasehold contract. These could include:
Access to a gym or swimming pool
Use of communal areas such as gardens
A concierge to sign and collect your parcels.
Of course, these aren’t technically free, as they come in a package along with your ground rent payments. But they could save you money, especially if you live in a city.
What is share of freehold?
If you buy a property and it‘s a ‘share of freehold’ this basically means you’re buying a share of the property.
You own part of the land and the building, and you share this ownership with the leaseholder. Here we look at some of the main positives and negatives.
The initial sale price could be more
It tends to be a house rather than a flat
You own the entire property outright
The main payments are for your mortgage and upkeep of the building
You’re responsible for maintaining the property
You have control over what happens to the property.
Usually a flat rather than a house
The cost of the property is usually less than with a freehold
Other costs apply including ground rent, buildings insurance, and the cost of renewing a lease
You could get extra perks including a gym, swimming pool, and parking
Any changes might need approval
You might not be able to have pets or sublet a room.
Should I buy freehold or leasehold?
The decision to buy a freehold or leasehold will depend on your own circumstances including your budget and the type of property you want to own.
Before you decide either way, take some time to calculate all the costs involved for the duration of the time you want to be living in the property.
Is freehold better than leasehold?
At the outset a freehold might seem better than a leasehold but the devil is in the detail.
If you can find an affordable leasehold and you’re comfortable paying any associated costs, it could be a better option for you.
Similarly, if you have your eyes set on a freehold you’re happy to be the person in control of its upkeep, it might be worth considering.
Is a 999 year lease as good as freehold?
The longer the length of the leasehold, the better. A long leasehold could boost the value of a property and it might also make it easier to sell.
However, when comparing it to a freehold there are other aspects to keep in mind. These include extra costs such as ground rents and maintenance fees.