Freehold vs leasehold
Buying your first home? You’ll need to find out whether the property you intend to buy is freehold or leasehold, and understand the rules that might affect you.
If you’re taking the plunge and buying your first property, there’s a huge amount to think about.
An important thing to know about the property you’re eyeing up is whether it’s freehold or leasehold.
In a nutshell, this means the level of ownership you have over the property. Each comes with its own responsibilities, and affects how much the property will cost to buy and sell.
As a rule of thumb, entire houses tend to be freehold and flats or apartments are usually leasehold. Although this isn’t always the case. That would be too easy, wouldn’t it?
For instance, a house might be leasehold if the people living there have set up a shared ownership scheme.
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What’s a freehold?
If you own the freehold, your home belongs to you outright. And this includes the land it’s built on.
It’s up to you to look after the property, so you should factor that into your budget. If you skimp on keeping it shipshape, it may prove more costly in the long-run when things inevitably deteriorate or break. It’ll also make the house harder to sell.
What’s a leasehold?
Leaseholds are a little more complicated. Here you own the property for a set amount of time, subject to the terms of the lease.
Normally, the previous owner passes the leasehold on to you. The freeholder (who’s also known as the landlord) will keep ownership of the building and the land it’s on.
When the lease runs out, the property returns to the freeholder. In theory, anyway. In practice, people often extend leases.
If you’d like to extend a lease, you must have owned the property for two years. You also need to be a qualifying tenant. That means the lease must have been for at least 21 years when you bought the property.
Once you’ve owned a property for two years, you have the right to extend the lease by 90 years. This might sound like a lot, but you’d probably struggle to get a mortgage on a property where the lease is less than 70 years.
So buying a property with a short leasehold is actually a gamble. Although you can extend a leasehold, the freeholder will charge you for this. And the less time that’s left on the lease, the more expensive it’s likely to be.
Likewise, it’s also a good idea to extend the leasehold beyond 80 years if you’re aiming to sell the property.
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Is having a lease similar to renting?
Not really. The freeholder owns the building, but you will still own your portion of the property. So, if you own the leasehold, you’re still a homeowner.
In other words, if your home is leasehold, congratulations. You’re on the property ladder.
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What difference does freehold vs leasehold make to the cost?
Just to recap, with a freehold property, the main costs you’ll have as an owner are mortgage payments and maintenance costs.
All properties are different of course and costs vary. But by and large, freehold properties tend to be more expensive at the start – after all, you normally get more space with a house than with a flat.
Where leaseholds are different is they usually come with ongoing charges.
It’s pretty standard for the freeholder to take care of looking after the building, and then splitting the cost equally between the leaseholders.
The cost can include things like looking after shared areas, any shared utilities, doing the gardening and any repairs to the building.
Before taking the plunge and buying a leasehold, find out whether there are service charges. There may also be other charges, such as ground rent, admin costs, or ‘factoring charges’ if you live in Scotland.
There may also be other services to pay for, like your share of buildings insurance.
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.
One more thing. The legal paperwork, or “Conveyancing”, usually costs more for leasehold properties. This is because the contracts with freehold properties are a lot more straightforward.
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What’s a share of freehold?
Leaseholders can also team up and buy the freehold from the landlord. This is called share of freehold.
At least half of the leaseholders in the building need to agree to this. If they do and everything goes to plan, the freehold is then divvied up between all the leaseholders.
This can be expensive. But on the plus side, if you share the freehold you have more control over the ongoing costs.
If the flat you’re looking to buy is share of freehold, you’ll have more of a say on how the whole building is run.
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Our top tip when weighing up freehold vs leasehold
Make sure you’ve thought of everything before you buy.
If you go for a freehold property, will you stay on top of the maintenance?
If you’re thinking of getting a flat, will it be a faff to extend the lease? Will you clash with other leaseholders? It can be a roll of the dice.
One thing we will say is, when weighing up costs, it’s wise to compare them over the longer term.
Freehold properties may be more expensive to buy, but the extra costs and charges that come with leaseholds can add up over time. So be thorough when you do your sums!