Freehold vs leasehold – what’s the difference?
It’s important to know whether the property you’re buying is freehold or leasehold, and it’s something that your solicitor is likely to bring up very early on in the property purchasing process.
So, what is the difference between freehold and leasehold, and how will it affect you when buying a property?
In this guide
- What is the difference between freehold and leasehold?
- What is freehold property?
- What is leasehold property?
- What is a share of freehold?
- Is my house freehold or leasehold?
- What are the disadvantages of buying a leasehold property?
- Is it hard to sell a leasehold property?
- Leasehold property depreciation rate
What is the difference between freehold and leasehold?
The main difference between freehold and leasehold property is who the land that your property sits on belongs to.
What is freehold property?
If you own a freehold property, you own the land the property sits on, as well as the property itself.
What is leasehold property?
If you own a leasehold property, you own the property itself, but have purchased a temporary ‘lease’ for the land the property sits on. Someone else retains ownership of the land and you pay them a fee to live on it. If you don’t extend the lease on the property, you must leave the property when the lease runs out as you will no longer have the right to use the land the property sits on.
A detailed and lengthy lease document will outline your contractual obligations when you purchase the property. Information outlined in the lease document may include details of the ground rent payable (the fee you pay to rent the land the property sits on), any service charges (this is particularly likely to apply if you’re purchasing a flat), and any other areas of responsibility.
Lease documents will usually feature complex legal language, so if you struggle to understand the requirements set out in the document it is important to seek legal advice from a conveyancing solicitor who can clarify any areas you’re unsure of.
What is share of freehold?
Share of freehold is a term that can cause confusion as it effectively combines both freehold and leasehold.
Share of freehold means the property is still a leasehold property, but you co-own the freehold with other parties. This is a common arrangement with flats, especially in London.
There are two different options for how share of freehold can be managed. Either you and the other flat owners within the building will jointly own the freehold between you in your personal names, or a company will own the freehold and you will each hold a share in that company.
Your solicitor should be able to explain the exact circumstances of the arrangement if you buy a property with share of freehold.
Is my house freehold or leasehold?
When you first view a property, the estate agent (or owner) should make it clear whether the property is freehold or leasehold.
If the property is leasehold, you will want to gather as much information as possible before making an offer. The terms of the lease will have an impact on your affordability and should be taken into account before proceeding.
What are the disadvantages of buying a leasehold property?
There are several aspects of buying a leasehold property that will need careful consideration
Decreasing time on lease
When you own a leasehold property the amount of time left on the lease will decrease over the period of time that you own the property. As the amount of time left on the lease begins to run out, it will have an impact on the value of the property.
Traditionally, leases were set for 99 years. These days, however, it is not unusual to find properties with leases of 125 years, 250 years or even 999 years. Any property with fewer than 100 years left on the lease is likely to have a lower value than a similar property with a longer lease, or a freehold property. Any property with fewer than 70 years remaining is likely to be unmortgageable. If the amount of time left on the lease is likely to be an issue for you, you’ll need to factor in the cost of extending the lease (often tens of thousands of pounds). If it may affect the next owner, it’s likely to affect your ability to sell the property when you want to move.
Most leasehold properties will have the added expense of ground rent, which is payable to the freehold owner. Ground rent costs will vary, but for a long lease property you can expect to pay around £50-£250 per year.
If you receive a demand for ground rent while you own a leasehold property, you must pay it. If you fail to pay any ground rent that is due, your landlord can take legal action.
You will need to check your lease carefully to see what it says about whether the freehold owner is able to increase the ground rent payable while you own the property.
Maintenance and service charges
You may also be required to pay an annual maintenance and service charge, or be responsible for ad hoc repair costs. This is likely to be more of an issue if you are purchasing a flat, but many new build houses also charge a maintenance and service charge to cover the upkeep and management of communal areas within the development. This is an added cost for you and any subsequent owners, which may have an impact when it comes to selling your property.
A leasehold property may have other restrictions on it that mean you need consent from the freehold owner before carrying out certain work or using the property in a specific way eg. running a business from the property or letting out a room. Check your lease agreement carefully and seek legal advice is anything is unclear.
Is it hard to sell a leasehold property?
If your property is a flat, buyers will expect it to be leasehold so it is unlikely to raise too many questions from prospective buyers.
Buyers can be a little more cautious when buying a leasehold house, simply because a leasehold property is likely to come with additional responsibilities and costs, but as long as you have all of the necessary leasehold information to hand, and the lease has a decent amount of time left on it, you hopefully won’t have too many problems.
Leasehold property depreciation rate
One reason buyers may be a little more cautious of purchasing a leasehold property is the depreciating nature of a leasehold property. The fewer years that remain on the lease, the less the property will be worth. Any property with fewer than 70 years left on its lease is likely to be unmortgageable.
If you’re keen to sell your property and it has fewer than 70 years remaining on the lease, you may be wise to look into paying to extend the lease before you put it on the market. If you’re short of time or money, and don’t want the hassle of extending the lease, you’ll need to be aware that only cash buyers would be able to purchase the property.
You could market your property on the open market, making it clear that you are advertising to cash buyers only, or you could look at selling the property to a professional cash home buying company. A genuine cash home buyer, with their own funds to purchase your property directly, will be able to purchase the property on the date of your choice. Any professional home buyer will purchase property at a discount, but they do offer a quick and convenient sale for those reluctant to extend a lease before selling.
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