Leasehold vs Freehold Property
It's all about the ground you live on
What are leasehold houses and should you buy one?
If you’re a property owner - or someone who is looking to buy a piece of property - in the UK, you’ve probably heard of the term “Leasehold House.”
Odds are, though, you may still be a little confused as to what exactly that term means.
However, it’s crucial to understand the type of property that you’re going to purchase. The term “leasehold” property carries with it a very specific set of legal situations and obligations that could prove consequential to your life and your family’s life.
It’s not something to be taken lightly.
Have no fear, however - we are here to help. In this article, we’ll go over exactly what a leasehold house is and lay out the pros and cons for you if you’re considering purchasing this type of property.
Ready? Okay! Let’s dive into the world of leasehold houses.
Leasehold vs. freehold - what's the difference?
In order to understand leasehold properties, we first have to delve into the other property option that’s out there - freehold properties.
In both of these situations, there are two portions of the property to consider: the first is the dwelling (the actual structure that you’ll live in on the property) and then there’s the land itself (that’d be the stuff underneath your feet when you’re living there).
The distinction is quite simple.
In a freehold property, the property owner (that would be you) has control of all of the land and the dwelling itself. You are master of the domain and the king - or queen - in the castle. The entire property is yours to do as you please.
However, in a leasehold property, you’re solely owner of the dwelling, not the land.
When you’re a leaseholder to a property, you’ll sign a lease with the owner of the land - the freeholder, or more commonly called the landlord - and you’ll live in your dwelling while residing on his or her land.
That’s not so hard to understand, is it?
Now let’s examine the implications of purchasing a leasehold property.
There’s an obvious benefit to purchasing a leasehold house compared to a freehold house.
Due to the fact that you’re not purchasing the land that the house is located on, the odds are that the price for you is going to be cheaper in the short term. However … there are a multitude of factors that will come into play when you sign an agreement for a leasehold house.
It’s up to you to consider these type of complicating factors and make the decision as to whether this type of housing arrangement is in your best interest.
Let’s examine them.
1. You’re going to have to sign a contract with the freeholder
It’s essential that you examine the length of time the contract specifies for your dwelling; the time can range from 20-30 years all the way up to 999 years. Make sure you’re comfortable with the length of time indicated on the contract, and know that the value of your dwelling may drop quickly after a few decades as the leaseholder if you’re on one of the shorter contracts.
The general rule of thumb is that the longer leases are more stable, and hold their value more.
Shorter leases may be cheaper up front, but the abbreviated period of time specified on the contract has the effect of making the leasehold property less desirable to buyers when and if you decide to move out. However, if you do have one of these shorter leases, you may have the opportunity to extend the lease for a length of time.
If this is something you’d like to do, engage a professional and examine your options.
It may very well pay off for you in the long run.
4 Great Reasons To Extend Your Lease:
2. You’re still going to have to pay a good bit of charges every month
As it is in an apartment situation, you’ll still be responsible for the fees and utilities that go along with the dwelling that aren’t covered by the freeholder in the contract.
That could mean insurance fees, maintenance fees, service charges, water, heat, electric and television charges, and a whole host of other money-draining elements. It’s vital that you go over these listings in the contract with a keen eye before you sign anything, so you’ll have a good handle on just how much money you’ll be laying out every month.
The average service charge, or fees leaseholders pay to cover their share of the overall building maintenance, now stands at £1,863 for all properties in Britain and £2,777 for new-builds. - The Guardian
Read more: Service charges and other expenses
3. You’re going to have to pay a “ground rent” to the freeholder
Here’s where the rub comes in.
The “ground rent” is the charge the freeholder sends you every month for the permission to live in the dwelling on your leasehold property. These fees can range from only a few pounds to something extravagant and excessive - a charge that could put a drain on your finances.
Again, scrutiny of the contract is completely vital for this process.
The ground rent payments should be written out and clearly defined in the contract. Know if the freeholder has permission to raise the ground rent at anytime, or if there are scheduled raises to the rent built into a kind of a schedule. Unscrupulous landlords are out there, and if you don’t look over the contract carefully there’s a chance you could get stuck with crippling rent increases.
Additionally, there has been a rash of ground rent schemes that rapidly increase over time - going from a few hundred pounds one year to a few thousand in the span of a few years.
Again, it’s absolutely essential to study this part of the contract to make sure you don’t get taken for a ride.
4. You could be responsible for maintenance and repairs
Again, this is something that needs to be determined in the contract.
Most of the time, there will be a fee that you’ll pay to the freeholder that will cover maintenance and repair of the common areas for the household; however, if the contract specifies it differently, you could be on the hook for a good chunk of change.
There’s another concern, too, with leasehold properties. Before you sign anything, take stock of large repairs that need to be done to the leasehold property - replacement of a wall or roof, for example. Freeholders can go in and charge you, the leaseholder, a significant portion of that repair through the fee charges specified in the contract.
It’s something to check and re-check before you sign anything for the property.
You’ll need to get permission to do anything major to the dwelling
Want to add in a skylight? Put in an addition? Knock out a wall? Add a door or a window? Redo the kitchen?
Those are all big projects, and for anything major along those lines, you’ll need to get permission to do them from the freeholder. Odds are that you’ll have to pay completely out of your own pocket for them, as well.
So, should you buy a leasehold house?
As it is with every big decision occasion, the decision is in your hands after you take into account all of the different factors.
The price for the house up front is generally likely to be lower than it would be for a freehold-type house, so if that is your primary, A-Number-One, above-all concern, a Leasehold House might be the way to go for your piece of property.
However … if you’re concerned at all about the fees for the leasehold property starting to pile up.
Or you not having the degree of control and customization over your property as you might have in other occasions, or the possibilities of your property declining in value due to the lease or money draining out of your pocket thanks to “ground rent” increases, it may be better for you in the long-term (or even in the short term) to hold out for a freehold type of property.
You’ll get the element of control, the ability to make the property your own, and the means to have at least some type of oversight over the amount of money you’re going to be spending on a monthly basis.
So - as it is with everything in life, and to paraphrase Indiana Jones and the Last Crusade, make your decision wisely. Consider all of the factors that will go into your purchase and make the best choice between leasehold vs freehold for you and yours. After all, it’s not just a house - it’s your home.
Put as much care into the decision as you would anything else, and happy hunting!