24 Mar 2022
What You Need to Know About Leasehold and Freehold Properties
You may have heard the terms “Leasehold” and “Freehold” come up when looking into purchasing a property – but what do they mean exactly?
It’s important to understand these terms as much as any other, so you know what you’re getting into when you’re looking at a property. Ending up with the wrong type of property may not match with your personal circumstances and end up costing you more money. In this article we’ll be looking at what each term means for you.
Leasehold – What Does it Mean?
Buying a leasehold property means you have the right to live in that property for a set amount of years. These years will be specified on the lease. A leasehold means you own the property but you don’t own the land it stands on. In these circumstances you’ll be referred to as the “leaseholder”.
Properties like flats and apartments are most commonly held on a leasehold basis, whilst houses are usually sold as freehold properties. This is the case in most of the UK, except for Scotland, where very few properties are sold as leaseholds.
In fact, Scotland abolished leaseholds in 2004, but Scottish homeowners can still gain income by temporarily leasing out their home without getting in any sort of trouble.
Having a leasehold property means that your landlord owns the land, which makes them the “freeholder”. If you have this type of property, then you (the leaseholder) will have to get permission from your freeholder landlord to make certain alterations to the property.
You are generally free to do minor works on a leasehold property like painting, decorating, kitchen and bathroom alterations. Bigger jobs like installing new windows and other structural alterations may require permission, so check your lease. If you are unsure about anything, it is always best to contact your landlord.
If you want to make any serious changes to your property like adding an extension or changing its use from residential to commercial for business, you will have to apply to the freeholding landlord for permission. If you don’t get permission before doing this, you could be forced to revert any changes you’ve made at your own expense.
As a leaseholder, you will also have to pay what’s known as a “ground rent” once each year. This will generally be a low amount such as £50 or £100, either paid all at once, split in half to every 6 months or quarterly (3 months). The demand for paying ground rent will need to be described in the lease or in another formal written letter in order to be valid and a legal requirement for you to pay.
So How Long Do Leases Last?
A leasehold can last a long time, commonly around 90 to 120 years and as high as 999. But there can be shorter leaseholds that only last 40 years. Generally, the longer the amount of time left on your lease the better, it can add a lot of money on to your property’s market value. Properties with shorter leases can be more difficult to sell and cost more to extend the lease.
A lease with 80 years or less remaining is considered bad, it can affect the value of your property and many mortgage providers may refuse to lend on these shorter-term lease properties.
Make sure you check how many years are left on the lease, as well as working out how many will remain by the time you’re likely to sell. As you can see above, this is a very important thing to consider.
After living in the property for two years you gain the legal right to extend your lease, you can also try asking if the seller is willing to extend the lease before you buy the property.
Once the lease term is up, ownership will revert back to the freeholder/landlord who will then have full use of the property again. You can offer to buy the freehold informally from the landlord, or you can legally and formally buy the freehold under certain criteria. This criteria includes having 21 years on the lease or more and holding 100% of equity, meaning any mortgage has been paid off.
If you own a leasehold flat, you’ll usually pay a service charge which will go towards maintaining common areas of the building. Whilst older leases have fixed service charges, newer agreements have a ‘variable service charge’ which means the fees may be raised to pay for one-off expenses like upgrading or refurbishing things like systems or lifts.
So is a Leasehold Property Any Good?
A leasehold property can be a great investment for you and your family’s future. However, it depends on how well written and reasonable the terms and conditions are on the lease. Make sure you read this carefully. You can also consult a conveyancing solicitor for help or speak to an online mortgage advisor to find the right type of property for you. This includes advice on leaseholds and freeholds.
Freehold is the much more straightforward of these two types of properties. When you buy a freehold property, you become the one and only owner of both the building and the land it’s situated on. This means no service charges, ground rent or need for permission on most structural changes, except for significant changes that may require planning permission.
You will also be responsible for the maintenance of all aspects of the building and its insurance, so make sure you have enough money coming in to fix things like leaks and structural damage to places like the roof and walls.
On top of these costs, freehold properties are usually more expensive to buy than leaseholds. So while it might sound more simple owning your own house outright and not having to pay any extra fees, it could actually be a lot more expensive, especially if the property does need maintenance work.
It all depends on what you can afford and if you like having your own responsibility, freedom and independence in a property.
Freehold vs Leasehold
So which is best? There are advantages and disadvantages to both. You need to consider your personal and financial circumstances. Make sure you weigh up your options, read any details and contracts carefully before signing and if in doubt, don’t forget to contact professionals like us at Mortgages Online for expert advice. Our contact details can be found below, or you can start your journey with us here.