When buying a property you will be presented with one of two options in the contract: freehold or leasehold.
Purchasing the freehold of a property is generally preferred by most homebuyers. The government has also recently placed restrictions on certain leaseholds so they may become less common moving forward.
Whether your property is freehold or leasehold is very important and should be something that you pay close attention to when making a decision on buying a property. You may even find that your otherwise ideal home is not a good fit for you to buy if the property is sold through a leasehold.
What is freehold?
Owning a property through a freehold means that you own both the property and the land that your property is built on for an indefinite term.
Because the property and the land are completely yours, you are free to do with them as you like – provided you have any necessary permission from your local council. This includes building an extension, renovating the garden and owning pets.
However, if you own your property through a mortgage, some restrictions may still apply on your enjoyment of the property such as being unable to operate a business out of your residential home.
What is leasehold?
Owning a property through a leasehold means that you own the property but not the land that it is built on and only for a fixed term.
After the term on your lease expires, ownership of the property automatically reverts to the land owner (the freeholder). Whilst you own the property you are subject to restrictions on what you can do with the property and will usually have to make payments to your freeholder such as ground rent and service charges.
Flats and apartments are typically sold through leaseholds but you may find some houses that are too, especially older ones.
Advantages of leasehold
There can potentially be some advantages to owning a property through a leasehold.
For example, leaseholders are not responsible for maintaining the structure of the building or obtaining buildings insurance.
If a leasehold property has any communal areas, then the leaseholder is not required to maintain them.
Leasehold properties can also be potentially cheaper to buy than if they were to be bought freehold. This is usually the case if the property has a very long lease – i.e., 999 years.
Disadvantages of leasehold
When owning a home through a leasehold, the leaseholder is subject to certain fees and costs. This includes ground rent which is an annual payment.
Ground rent may be nominal or even free depending on the freeholder, but could also be substantial with the opportunity to increase in the future. The standard rate for ground rent used to be £250, while more modern ground rents equate to 0.1% of the property value.
Whilst leaseholders are not responsible for insuring the building and providing maintenance or repairs to its structure, they will be required to contribute to these costs through maintenance charges.
A leaseholder may be subject to restrictions on their enjoyment of the property. The freeholder may state that no pets are permitted inside the property, for example, and permission would be needed from the freeholder before planning any changes to the property like an extension.
Finally, at the end of the leasehold term, the ownership of the property transfers to the freeholder. This can make selling a property with a lease under 100 years difficult to sell. When a lease is under 100 years, an extension to the lease can be purchased from the freeholder.
999 year lease vs freehold
A 999 year duration on a lease is the maximum that is permitted. Many people view a 999 year lease for all intents and purposes a freehold because the associated disadvantage that come with owning a lease close to expiry is not an issue.
However, the leaseholder will still be subject to all other disadvantages that come with owning a property through a leasehold such as ground rent, service charges, and restrictions on what they can do with the property.
Are new builds freehold or leasehold?
All new build homes are now sold as freeholds.
This comes after government acted to combat the rise of exploitative ground rents on new build homes.
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