Guide To Buying Freehold & Leasehold Properties
When buying property, you have two basic options – freehold or leasehold. As such, it’s vital to understand the two terms to know the kind of ownership you’ll have when you buy a property. Our guide will help you to understand the difference between freehold and leasehold.
Essentially, the type you choose will determine the kind of changes you can make to the property, whether you’ll be required to pay ground rent and the period you’ll own it.
A freehold property refers to the absolute and permanent tenure of the property, including the land. If you buy a freehold property, it means that you completely own the property and the land on which it stands on, unless you make a decision to sell.
If you didn’t purchase the property as freehold, then your landlord (an individual or a company) will be the freeholder. Generally, most houses are sold as freehold while flats are leasehold, but freehold flats and leasehold houses do exist.
Leasehold ownership, on the other hand, means that you own the property for a specified length of time as per your lease agreement with the freeholder. Unlike a freehold property, you’ll not own the building itself and the actual land on which it stands on; you’ll only pay for the rights to own the property until the lease ends.
The lease agreement determines what you own and what you don’t, plus what you’re allowed to do and what you cannot do to the property, e.g. moving the structure. The landlord resumes ownership of the property when your lease ends.
The differences between leasehold and freehold
Before you make a decision to choose freehold or leasehold, it’s advisable to consider the pros and cons of each.
The pros of freehold
- You have exclusive rights to the property so you don’t need to worry about your lease agreement expiring
- You can improve, renovate or redecorate the property as you desire without asking for permission
- You’ll not deal with a freeholder/landlord
The cons of freehold
- The responsibility of maintaining the property, its facilities and its exterior is on you
The pros of leasehold
- When it comes to conducting repairs to the property, you’ll have less responsibility as it will be up to the landlord
- It’s ideal if you only require short-term accommodation
- You can purchase the property outright if you meet certain criteria, or you can use collective enfranchisement to buy a share of the property
The cons of leasehold
- You’ll have to renew your lease when it expires, which depends whether the landlord will agree
- You’ll be required to pay ground rent
- You’ll often be charged considerable service charges, including garden upkeep, cleaning of communal areas, building insurance and general maintenance
What to consider before you buy a leasehold property
There are several vital factors that come into play if you’re considering to purchase a leasehold property:
- A leasehold is a type of ownership, albeit similar to a long-term rental
- You only own the property for the agreed period
- With a leasehold, you’ll likely have to pay other fees, including ground rent, insurance fees and service charge
- It can be quite costly to extend the lease agreement once it expires
- You’ll require permission from the freeholder if you want to make changes to the property
- The freeholder will be responsible for major repairs, but you’ll be responsible for maintaining the interior of the property
How to find out the owner of the freehold
It’s vital to know the name and address of the freeholder before you sign any lease agreement. The land and property register will provide you with all the relevant information.
How a leasehold works
In recent times, many real estate companies have been developing leasehold houses. Although these houses are not as common as freehold ones, they’ve been gaining popularity because of their affordability.
However, before buying a leasehold house, you should ask yourself:
- Will you own some or all of the rooms?
- Will you own the garden?
- Are there any bills you’ll be required to pay?
- Can you redecorate?
These questions are essential, and you should have satisfactory answers before you proceed to buy a leasehold house. Leasehold ownership of a house is different from flat ownership because you’ll own more than the interior, e.g. a driveway or garden, but not the entire property in some cases.
This means that you can make certain changes to the property; however, you ought to check with the freeholder to avoid penalties that may come with lease violation. Lenders often decline these types of properties due to ongoing lease costs such as the ground rent and service charge.
How to buy the freehold on your house
If you meet certain criteria, you can apply to buy the freehold on your house. Approach your landlord with your offer, but this does not mean that they’re obligated to sell.
If it’s a shared ownership home, you have the right to buy additional shares until you own 100% of the property. Keep in mind that the specific details will depend on the terms of your lease.
Leasehold ownership of a flat means that you own only the interior of the property, but it excludes the property’s structure and anything outside of your flat. The land and any communal areas are owned by the freeholder. The leaseholder will be required to pay a service charge, but it’s the duty of the freeholder to maintain the exterior of the property.
If you’re simply renting, you’ll not have any rights to the property. But if you’re a leaseholder, you have some rights to the flat, e.g. you can change the carpets or paint the walls. Check with your lease terms first before doing any decorative work.
How to buy the freehold on your flat
Buying freehold is more complex for flats than houses because the flat will most likely be part of a building and on the same land with other buildings as part of a complex. You’ll not be a single freeholder unless the owner sells the entire complex to you; therefore, you’ll jointly own the freehold together with other tenants in the building. This is referred to as collective enfranchisement or shared freeholders.
The difference between freehold and leasehold mortgages
Mortgages for leasehold properties are more complex than those for freehold properties; however, the products available are often similar, e.g. you can have a variable, tracker or fixed-rate mortgages. There are numerous options available in the market, but each lender will have their own terms and conditions.
You can take out a mortgage on both leasehold and freehold properties, but many lenders will often allow potential homeowners to borrow leases of 80 years and above. This is because the cost of buying the freehold or extending a lease is higher when the remaining years drop below 80 years.
What might suit your needs is not always straight forward. Our advisers at Orchard Mortgage Solutions will evaluate your unique situation and explain whether you should buy freehold or leasehold. Contact us today for more information.