Freehold v Leasehold
Depending on whether you buy a freehold or a leasehold property, there may be limits on what you can do to your own home.
What is Freehold ?
If you own the freehold of a property, this means the property is owned outright, including the land it’s built on. So, if you buy a freehold, you’re responsible for maintaining your property and land. You’ll need to budget for these costs.
Most houses are freehold, but there are some that can be leasehold.
With a Freehold property you will not have to:
- Worry about the lease running out
- Deal with a Freeholder
- Pay ground rent, services charges or any other landlord charges
Owning a Share of Freehold
It’s possible to buy the Freehold of a property from the landlord. This is usually done with other leaseholders. By way of example, this might be other people living in the same block of flats.
At least half of the leaseholders will need to agree to purchase the Freehold before it can be purchased. Buying a Freehold might give more control over the property and likely costs.
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There’s still a lease. It’s just that as you are the Freeholder you can grant a new lease easily. A lease of say up to 999 years.
Lease holders will need to serve a Notice, called a Section 13 on the current landlord.
It might be expensive to buy the freehold. It’s necessary to set up a company to manage the building. Or, you can find a managing agent.
For more information you can visit the at The Leasehold Advisory Service website
What is Leasehold?
With Leasehold, you own the property for the length of your lease agreement with the Freeholder. You’ll be bound by the terms of any lease as well as its length.
When the lease ends, ownership of the property returns to the freeholder. Leases can be extended.
Most flats and maisonettes are Leasehold. In effect then, you own your property in the building. But you have no stake in the building itself.
Some houses are sold as leaseholds. Where this is the case you own the property, but you don’t own the land it sits on.
Buying a Leasehold
When you buy a leasehold property, the current lease is taken over by you from the previous owner.
Before making an offer of a Leasehold property you’ll need to consider:
- The number of years that remain on the lease
- The cost of service charges and other related costs
These two main factors might affect getting a mortgage and the property resale value.
Length of Lease
Where a lease has less than 70 years to run, mortgages are possible but not all lenders are prepared to proceed. You might struggle to get a mortgage.
Most lenders normally need a lease to run for 25 years beyond the end of your mortgage.
Therefore, if you want to get a 25 year mortgage the lease needs to have at least 50 years before it ends. When you eventually want to sell a leasehold property you’re buying, think about how many years will be left on the lease.
The shorter the lease the more difficult to sell a property.
Extending a Lease
A landlord can extend a lease at any time. Once you’ve owned your home for two years, you have the right to extend your lease by 90 years, provided you are a qualifying tenant. Usually, a qualifying period is more than 21 years of lease at the time of purchase.
Freeholds will charge for extending the lease. Extension costs depend on the property. If the cost of extending can’t be agreed there is an appeal process. You should seek legal advice in this regard.
As previously stated, if you own a leasehold property, you don’t own the land. Therefore, you won’t be responsible for maintaining and running the building. A managing agent is normally appointed for this.
However, leaseholders share the costs of maintenance and charges, by paying a service charge to the landlord. Sometimes there’s also what’s known as a sinking fund that is set up to cover any unexpected maintenance work needed in the future.
Leasehold service charges
Service charges vary from property to property. Service charges are used to pay for things such as:
- Maintaining garden areas
- Communal area Utility Charges
- Repairs and Maintenance
Make sure you’re aware of theses charges before you put in an offer on a property. Not only can this impact on mortgage affordability but you’ll need to budget for the costs also.
Additionally, if you own a leasehold property, the repairs and maintenance on your property are your responsibility. However, you’ll usually need to get the landlord’s permission to make any significant changes.
Watch out for other charges including:
- Ground rent
- Buildings Insurance
For more information about Freehold and Leasehold property and how these fit in with applying for a mortgage call or book an appointment with an adviser.