Freehold vs leasehold

Buying a house is a big decision. It’s important you have a good knowledge of leasehold vs freehold before you sign on the dotted line. The difference between the 2 terms could mean you either own your home outright or you have a landlord. 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. Here's everything you need to know on freehold vs leasehold.

Block of flats on leasehold

 

Ground rents banned for qualifying leasehold properties from 30 June

From 30 June 2022, freeholders won’t be able to charge ground rent on new, qualifying residential leases in England and Wales. 

You pay ground rent if you have a leasehold property. You usually pay this to the freeholder.

The government has been trying to abolish ground rent for several years, and is “part of the most significant changes to property law in a generation”.

After 30 June, most new, qualifying leases can’t legally charge ground rent for anything more than “1 peppercorn per year”. The government says that ‘peppercorn rent’ means no money can be legally charged as ground rent on leases regulated by the Act. So it essentially means that ground rent should be £0. 

The change also bans freeholders from charging administration fees for collecting the peppercorn rent. They could face a penalty of £30,000 if they’re found going against the new rules.

The changes don’t apply to people who have statutory lease extensions for their houses or flats. 

If you’re entering into a voluntary lease extension after 30 June, the extended part of your lease should be reduced to the peppercorn rent. 

You can find out more at GOV.UK.
 

What is leasehold?

The meaning of a leasehold is, if you buy a leasehold property, you enter into a contract to own it for a set amount of time.

This should be set out in the lease, along with any other conditions of the contract.

 

Pros of leasehold:

  • The cost of the property is usually less than with a freehold.

  • The freeholder has the responsibility to maintain common parts of the building. For example, the entrance hall, staircase, garden, exterior walls, and the roof.

  • Leases can extend.

  • You could get extra perks including a gym, swimming pool, and parking.

 

Cons of leasehold:

  • Usually a flat rather than a house.

  • Other costs apply including ground rent, buildings insurance, and the cost of renewing the lease.

  • Leaseholders pay maintenance fees to the freeholder.

  • The building, and the land it's built on, belong to the freeholder, who is also known as the landlord. Any changes need their approval.

  • You might not be able to have pets or sublet a room.

  • Leases don't last forever, and can only last as long as 999 years. The less time left on the lease, the more expensive it could be.

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What is freehold?

The meaning of freehold is you own the entire property and any land it’s built on.

Owning a freehold can be seen as the better option, but it can have its downsides.

 

Pros of freehold:

  • You outright own the property and the land it's on.

  • You have control over what happens to the property.

  • It tends to be a house rather than a flat.

 

Cons of freehold:

  • You're responsible for keeping the entire property in good condition.

  • You should keep up with general maintenance of the property. If the property is in bad condition and in need of a lot of work, it may be harder to sell.

  • The initial sale price could be more.

 

What’s the price difference between leasehold and freehold?

One of the most important aspects when buying a property is the cost. This is especially important when considering leasehold vs freehold.

On the whole, buying a freehold property can be more expensive than a leasehold at the start.

This is because if you buy a freehold it’s usually a bigger property. Leaseholds tend to be flats rather than houses. But a leasehold usually has cheaper upfront costs.

With a freehold, you’re responsible for paying the mortgage, as well as maintenance costs to keep the house in a good condition.

With a leasehold you might need to pay maintenance fees, ground rent, and a share of the home insurance policy.

You also might have to pay for administration fees. These could be higher than for a freehold because the paperwork might take longer to organise.

It’s also common to contribute to a sinking fund in a leasehold. This is a rainy-day pot for any unexpected maintenance or repairs that need doing, such as a broken boiler or new roof tiles.

These fees aren't always set in stone either.

Pay particular attention to things like ground rent 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've 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. This then 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 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 costs if you think it could 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.

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.

 

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 subletting one of your rooms out. These should all be outlined in the contract so read this before you sign.

Living in a leasehold means if work needs to be done on your property it’s the landlord's responsibility 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.

But owning a freehold means you've got total control over what you do with the property.

You can make any changes, 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

  • Free parking

  • 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.

 

Can you change the terms of a leasehold?

As a leaseholder, you can't change the lease terms without the agreement of your freeholder (landlord).

This is because the lease is a contract between both parties, the leaseholder and the landlord.

 

Can a lease be extended or renewed?

Yes, but 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.

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.

A short lease term might also lower the 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 2 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 80 years.

You also need to be what ‘s called a ‘qualifying tenant’. This means the lease must've been in place for at least 21 years when you bought the property.

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.

But if you plan to sell the property, you might want the current lease to last more than 80 years.

 

Do leaseholders have to pay rent?

Yes. Because leasehold is a tenancy, you should make rent payments to the landlord.

You might have to also pay other costs like ground rent, buildings insurance, and a sinking fund.

 

Can a leaseholder buy the freehold?

If you buy a property and it‘s a ‘share of freehold’ this 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 freeholder.

 

Should I buy freehold or leasehold?

The decision to buy a freehold or leasehold depends on your own circumstances. You also need to decide your budget and the type of property you want to own.

Take 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.

Or your eyes might be set on a freehold and you’re happy to be in control of its upkeep. In either case, which one is 'better' depends on what you want to get out of it.

 

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.

But 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.