By Arti Dhamu, Move Specialist.
When buying a property for the first time, it’s easy to feel overwhelmed by the vast amount of new information and terminology you come across. That’s understandable; there is an awful lot to digest.
There are two terms that you should understand early on in your property search: leasehold and freehold. These refer to the type of ownership the property is being sold with. Which ownership you’re sold fundamentally affects things such as how much owning the property is likely to cost you and what you can do with it. So, let’s clear up the difference between freehold and leasehold property, so you can pick the right new home for you.
In this article:
- What is a leasehold property?
- Can I renew or extend my lease?
- Can I buy the freehold?
- Leasehold vs freehold
What is freehold?
Owning freehold means that you own both the building itself and the land it’s on. You own it indefinitely, until you choose to sell. The Land Registry records will name you as the ‘freeholder’, and usually with ‘title absolute’ (also known as ‘fee simple’).
As the property is entirely yours, it’s also entirely your responsibility. This means that you are accountable for maintaining the building and interiors yourself. As such, it’s recommended you take out buildings and contents insurance – in fact, your mortgage lender will likely require it.
With all this responsibility, you may be asking yourself, ‘why is freehold better?’. Ultimately, it does depend on what you’re looking for in a property, but the main benefit of a property being all yours is that you have free rein over what you do with it. As a freeholder you have the right to make the changes you want (subject to appropriate planning permissions), and no one can tell you whether you can get a pet, for example.
What is a leasehold property?
Purchasing a leasehold property comes with more complexities than freehold. Although you do technically own your home, your ownership only lasts for as long as your lease. You are likely to be subject to some legally enforceable restrictions on what you can do with your property, such as restrictions on pet ownership or changes to the property itself.
A leaseholder will usually be required to pay service charges to the freeholder for maintenance of shared areas (such as staircases and vestibules). Owners of residential long leases are also frequently required to pay ground rent to the freeholder. Fortunately, new government legislation came into effect in June 2022 that banned ground rent charges on new residential leases. However, existing ground rents are still payable, which applies to the majority of leases; it’s only new ones that’ll be exempt.
When the lease expires, ownership of the property passes back to the freeholder, who owns the building and land outright. This is rarely a problem though, as the period of a lease is usually over 100 years and can be up to 999 years. A lease with 999 years on it can be considered as good as a freehold, but you’ll still benefit from the advantages of leasehold ownership. It’s only when the lease term is lower than 85 years that it poses a problem.
Learn more about buying a leasehold property.
Can I renew or extend my lease?
Recently, government legislation has come into effect to make it easier for leaseholders to extend their lease. However, it’s still an expensive process, particularly if the lease term is approaching the 80-year mark. The closer it gets to 80 years, the more it will cost to extend it. Once the remaining lease term is under 80 years, the cost skyrockets.
It is worth extending your lease, though. A lease of more than 100 years can add thousands to your property’s value but, as the expiry date grows nearer, the property value plummets. If you’re considering buying a leasehold, make sure you know how long the lease is before moving forward.
If you already own a leasehold property and the lease term is getting to around 85 years, it’s time to seriously consider extending
Can I buy the freehold?
If you’ve owned the leasehold on your property for two years or more, and there are at least 21 years remaining on the lease, you have the right to buy the freehold.
It’s actually not very common for a leaseholder to buy the freehold. This is mainly because most leasehold properties are flats. If you want to purchase the freehold of a flat, all your fellow leasehold neighbours in the block would have to club together and agree to jointly buy the freehold.
If you decide to proceed with buying the freehold, you’ll need to start by giving the freeholder notice and the opportunity to reply. At this point, a price can be agreed, and the sale undertaken. If you and the current freeholder can’t agree on a price, the issue can be taken to tribunal, where an independent third party will set the price. There are several moving parts to the process of buying the freehold of your leasehold property, and it can get complicated, so it’s advisable to have a solicitor on hand to help you.
Is a leasehold worth buying?
Only you can decide whether buying a leasehold property is right for you. The prospect of an expensive lease extension should certainly factor into your decision. That said, if you pick a property with more than 100 years remaining on the lease, you won’t see any effect on your property’s value for decades to come.
If you’re considering buying a leasehold, be sure of the remaining term before proceeding. Also, make sure you know the fees and charges you will be liable for, and what restrictions and responsibilities you can expect.
Leasehold vs Freehold
So, which is better: leasehold or freehold? Buying freehold is commonly thought of as preferable to leasehold, but there are pros and cons associated with each. It really depends on your circumstances as to which is the better option for you.
Advantages of buying a freehold property
- Full ownership of the property and land (provided you keep up your mortgage payments)
- No service charges or admin fees
- Control over what you do with your home
- No need to consider lease extensions to retain property value
Disadvantages of buying a freehold property
- Can be more expensive to buy
- Usually houses rather than flats, so if you’re looking for a flat, you will struggle to find freehold options
- Responsibility for all upkeep costs, including buildings insurance
Advantages of buying a leasehold property
- Can cost less to buy than freeholds (but this is due to the risks involved)
- Less responsibility for maintenance
- No need to buy buildings insurance (though you’ll still need contents insurance)
Disadvantages of buying a leasehold property
- You’re effectively answerable to the freeholder
- Service charges and admin fees
- Need permission to make changes to the property (which may incur fees)
- May not be allowed to own a pet
- Value of property decreases as the lease gets shorter
- More expensive conveyancing fees
- Cost of lease extensions when required
Need more information or advice on your property purchase? Our quote advisers are happy to help answer any questions you may have.