If you’re just getting started in the property market, you might have noticed the words ‘Freehold’ and ‘Leasehold’ in the sale listings. But what do those terms mean, and how are they different? And what are the pros and cons for you?
When you purchase a property in the UK, it will be either freehold or leasehold. Freehold is when you own the entirety of the property, the fabric of the building and any outside space that comes with it (or, in the case of a flat, your part of the building). It’s yours to do with as you will, subject to planning laws of course. (And again, the caveat with flats is that you may have less freedom to make changes than you would in a house).
Leasehold is when you are buying the lease on a building. You’re buying the right to live there for a certain period of time, without actually owning the external fabric, or freehold, of the building. This remains the property of the leaseholder, and leases tend to be around 99 years or more. Leasehold properties tend to be less expensive than freehold, which can make them seem a good option when getting on the property ladder.
Let’s dig a little deeper, shall we?
We’ll take a look at leasehold properties first. Most flats tend to be leasehold properties, and the arrangement used to be that leaseholders paid fees to the freeholder, known as ground rents, and these fees could be increased at any time. However, government legislation brought into force in June 2022 has banned ground rent charges on most new residential leases. However, it’s still something to look for before making an offer on a leasehold property.
And what about those leases? As mentioned above, leases tend to run for around 99 years, but can be as long as 999 years. Anything less than 99 years does make the leasehold less valuable, meaning the property will be harder to sell and, in some cases, difficult to remortgage. Extending a lease is done through negotiation with the freeholder, and can cost thousands of pounds, as the cost is generally estimated at being 50% of the ‘marriage value’ of the property, or the extra value the property would gain through having a longer lease.
When you purchase a property leasehold, because you don’t own the fabric of the building, you may have to seek written permission from the freeholder to make any significant changes, and there may be additional charges involved. You may also be restricted from owning a pet or running a business from home, subject to the agreement with the freeholder. If you violate this agreement, you could end up losing your lease. Conveyancing fees are also more expensive when purchasing leasehold, due to the additional work involved. Essentially, leaseholding can sometimes feel like a more expensive rental agreement.
However, there are positives. Leasehold tends to be less expensive than buying freehold, making it a comparatively affordable way to get on the property ladder. When you own a leasehold flat you aren’t responsible for maintenance costs to the external building or communal areas, as you would be if you were a freeholder, which can save you tens of thousands of pounds. The freeholder also has to pay any building insurance (though not contents). You also have the right to buy the freehold on your property if you’ve lived there for two years or more, and if the freeholder is agreeable, of course.
Now let’s look at buying freehold, where you would own not just the building but also the land around it, as defined by the property boundary. One pro of this, of course, is that the property belongs to you and your descendants, for as long as you want to own it (or if you fail to make your mortgage payments and it gets repossessed).
The downside to freehold, which is essentially just part of home ownership, is that you are responsible for all associated costs and maintenance, including insurance and council tax. You may also be up for fees associated with the management of communal areas and gardens, should you live in a flat. However, the building is yours to do with as you wish (subject to planning of course, as mentioned). Freehold is also more expensive to purchase than freehold and, as prices remain high, this is probably the biggest obstacle facing many would-be homeowners.
Source: https://jameslaurenceuk.com/jl-news/freehold-versus-leasehold/