When it comes to dealing with properties, certain terminologies need to be addressed. Ample research is necessary, as anything less can hinder you from making well-informed decisions. One of the most confusing aspects of the real estate world is the difference between a freehold and leasehold property, which prospective buyers often mix up.
It’s important to understand the difference between the two, particularly when it comes to the costs and maintenance involved. It’s also vital to remember that these tenures can affect your long-term goals, especially if you wish to own a property you wish to reside in for long periods.
To help you understand the key differences between freehold and leasehold, we’ve created this quick and easy guide to follow. Here, we talked about the benefits and disadvantages of each tenure, along with other considerations you need to know.
Knowledge is power, especially when it comes to the real estate market. Let’s begin.
Freehold and Leasehold: Everything You Need To Know
What is a freehold?
Typically, buying a house entails buying a freehold property, although some houses may come as leasehold properties (typically through shared ownership). Purchasing a freehold property means that you get to take ownership of the property as well as the land that it stands on. The land and the property will be yours in perpetuity after you purchase freehold property.
If you buy a freehold property, you will own it outright and be responsible for maintaining the property and land. Although buying a freehold property does not come with the additional costs associated with leasehold properties, you’ll need to allow some budget for maintaining your freehold property.
Why should you invest in a freehold property?
Investing in a freehold property comes with a set of advantages. One of the most important advantages of owning a freehold property is owning the property outright, which means that you won’t ever have to worry about your lease running out.
You also don’t have to deal with landlords when you own a freehold property. This means that you don’t only own a share of the property and do not have to pay rent, service charges, or other charges that a landlord might subject you to.
You and other leaseholders (such as other people living in a block of flats) can agree to buy the freehold property from a landlord as long as half of the leaseholders buy a share of the property. If you decide to do this, you allow yourself to have more control over the property and the costs that you pay. Doing so also allows you to easily extend your lease for up to 999 years.
Caveats to a freehold
Although buying a freehold property has its perks, it also comes with some disadvantages. The most significant caveat is that buying a freehold can be a rather expensive investment. You might want to look for ways to save money when purchasing the property. Furthermore, you need to find a managing agent or set up a company with other leaseholders to manage the establishment once it is set up.
What is a leasehold property?
Leasehold properties usually pertain to flats, where the ground the flat is built on is owned by a landlord. People who own the flats, on the other hand, merely pay a ground rent annually to the landlord. When you purchase a flat property, you own only the building—and never the land it was built upon.
It’s also possible to only own the property for a specific period, which can be dictated by the lease agreement you agreed to sign. When this lease ends, all ownership will return to the landowner—unless lease extensions are discussed.
Apart from flats, maisonettes are also a common type of leasehold property. Other houses are also sold as leaseholds, but the nature of the property remains the same—you will never have ownership of the land it has been constructed on.
What should I know before buying a leasehold?
When you purchase a leasehold property, keep in mind that you may be taking over a lease from a previous owner, but only encompassing the property. That said, it’s important to proceed with caution. Consider the following elements before making an offer:
How many years are left on the lease agreement or contract?
How can you properly budget for service fees and other related costs?
Can the length of the lease affect getting a mortgage loan?
Can the length of the lease affect the property resale value?
It’s also important to remember that the length of the lease must be taken into account. If the lease is for less than 70 years, for instance, getting a mortgage may be difficult to do, if not entirely impossible. Lenders will generally need the lease to run up to 30 years beyond the end of your mortgage, which is why it’s important to consider how many years is left on the lease.
Why should you invest in a leasehold?
Apart from the difficulties surrounding the mortgage, it’s important to remember that you don’t own the land. As a leasehold property owner, you’re not responsible for running and maintaining the building, leaving you with more room to focus on the structure. Any mowing, landscaping, and exterior concerns will be left to the care of the landowner, effectively cutting costs on your end.
Caveats to a leasehold
Although maintenance and operational costs are handled by the landlord, keep in mind that you may be asked to share a portion of the costs through a service charge agreement. You may be asked to pay for a sinking fund, for instance, which helps cover any unexpected costs and maintenance in the future. The service charges will be used as follows:
The maintenance of communal gardens, patios, and other amenities
The utility charges for communal areas
The repair and maintenance of the exterior walls
That said, it’s important to be aware of these chargers before putting in an offer. It could potentially affect your bottom line, especially if you’re running on a budget. Any repairs and maintenance on your property will be covered by you—so choose wisely.
Other things to consider
Extending the lease
When you own a leasehold property, you can request an extension of the lease at any time. Typically, you will be charged by the freeholder (landlord) for extending your lease.
If you and the freeholder cannot reach an agreement on the cost of extending the lease, you can make an appeal to the Leasehold Valuation Tribunal. You likely will need to hire a solicitor and surveyor, and this can also increase the cost.
If you’re a qualifying tenant who has owned the home for two or more years, you can extend your lease by up to 90 years. You typically will be a qualifying tenant if the original lease was for more than 21 years.
The Bottom Line
From everything said and gathered about freehold and leasehold properties, we can safely deduce one fact: always do your research on the property you wish to purchase. Doing so allows you ample time to prepare, especially when it comes to costs, maintenance, and other unexpected surprises that may affect your quality of life.
It’s also important to dedicate time to making a decision, especially since you’ll want to gain your money’s worth. In the real estate world, thinking smart ensures you invest wisely.
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