In this blog post, we will explore the world of freehold and leasehold ownership. You’ll discover what it means to own a freehold vs leasehold property, how costs and responsibilities vary between the two, and much more.
What is Freehold?
When you purchase a freehold property, you are buying it outright – meaning you own both the property itself and the land on which it stands. This will be your once you’ve completed the transaction, and it remains yours indefinitely. This type of ownership is probably what comes to mind when you think about owning property.
One advantage of purchasing a freehold property is that no annual ground rent is due. Another benefit is that you’ll not have to deal with a landlord or manage complex leasehold agreements. However, this also means that all repairs, maintenance, and insurance matters fall squarely on your shoulders.
The process of selling a freehold property can also sometimes be more straightforward than selling a leasehold one. Potential buyers might prefer this type of ownership because of the relative simplicity and permanence.
What is Leasehold?
Buying a leasehold property gives you the right to live in it for an agreed period – usually long term (often 99 – 999 years), but certainly not forever. The land upon which the property stands remains in the ownership of what we call ‘the freeholder’ or ‘landlord’.
Leasehold properties often comprise flats within larger buildings, where it would be impractical for individual owners to maintain common areas individually. As such, management companies (or landlords directly) take the responsibility for maintaining communal spaces like gardens or hallways and charging service charges for those works from leaseholders.
You should note, though: as simple as paying service charges may sound, leases can come with certain restrictions. These could include clauses on pets, subletting or even redecorating which need to be adhered for compliance reasons.
When you’re buying a leasehold flat check remaining years left in the lease since it directly affects its reselling potential. Short leases can decrease value, whereas extending them incurs costs which are negotiable with landlords.
Also, factor in ground rents; some ground rents can increase over time based on calculations written into leases or because of extra permission costs from landlords.
Both types of property have their upsides and downsides; understand which one suits your needs and lifestyle before deciding.
Mortgages for Freehold and Leasehold
Whether a property is freehold or leasehold can make a difference when you’re looking to secure a mortgage. This mainly comes down to risk assessment for the lender.
For freehold properties, the process is typically straightforward, as they are often seen as less risky investments from a mortgage lender’s perspective. Once you’ve met their lending requirements, getting a mortgage should be fairly standard.
Leaseholds can be a bit more complex. Mortgage lenders assess the number of years remaining on the lease when deciding whether to approve your loan application. If the lease duration is short, this could impact your chance of securing a mortgage, as it may significantly reduce the property’s value towards the end of the lease term.
Typically, lenders require leases to have at least 70-80 years remaining at the time you take out your mortgage. They might not lend if there are fewer years left, and potential buyers may face issues when trying to sell such properties.
Service charges or ground rent associated with some leasehold properties might also affect your ability to afford repayments in lender’s eyes, hence affecting approval rates.
Freehold vs Leasehold Comparison
– Own the property and the land on which it stands
– Ownership is indefinite
– The right to live in a property for an agreed period
– The land remains in the ownership of ‘the freeholder’ or ‘landlord’
– No annual ground rent
– Responsible for all repairs, maintenance and insurance costs
– Pay service charges for the upkeep of communal areas
– Ground rents can increase over time
– Fewer restrictions; you have more control over property modifications
– A lease may include certain restrictions on pets, subletting etc.
– Must seek permission from the landlord for significant changes to the property
– Potential buyers might prefer this because of simplicity and permanence
– Short leases can decrease property value
– Extending leases incurs costs which are negotiable with landlords
- The Leasehold Advisory Service – This service provides free advice on residential leasehold and park homes law.
- GOV.UK – The British Government’s official website provides comprehensive guides covering different aspects of owning a property.
- Money Advice Service – An independent service providing free and impartial money advice set up by the UK government.