Leasehold vs Freehold: What’s the Difference?
Millions of homeowners around the country have heard of the terms, leasehold and freehold but what do they mean? In simple terms, freehold is where you own the property and the grounds it stands on for an unlimited amount of time. Leasehold is where you own the property but not the grounds it stands on. In today’s guide, we will take a look at these terms and what they mean when you are buying a new home.
What is a leasehold?
A leasehold property is where you own the building but not the grounds that it stands on. Ownership is therefore set for a period of time which could be years, decades or even centuries. Once the lease ends, the property passes back to the freeholder.
For example, many apartments and maisonettes are sold under leasehold. You own the apartment*, but have no say in the building itself. This is where service charges for the running of the building are usually accrued.
Essentially, under a leasehold you are considered a tenant of the freeholder for the period of the lease. *You own the lease not the apartment – however you can sell the physical property at any time.
Leasehold lengths are an important part of this kind of property ownership. Many properties have long leasehold periods including 200 year leases. However knowing how long is left is essential.
A long lease period can add thousands to your property’s marketing value.
A lease less than 80 years is a red flag for both the owner and the banks. It can be difficult to sell a property with a lease on such a short term left. Freeholders who own the property know this. When your lease drops below 80 years, they get a payout. You will pay 50% of the property’s “marriage value*” on top of the usual lease extension price – which can be thousands!
*Marriage value is the amount of extra value a lease extension would add to your property.
If you were to extend your lease you can do this any time when asking the landlord, and after 2 years of ownership you have the right to extend by 90 years. Usually, you will be a qualifying tenant if your original lease was for more than 21 years, and the freeholder will charge for extending the lease.
The cost will depend on the property. It is worth doing this especially if your property is coming up to a lease with fewer than 80 years left and avoiding hefty bills in order to either extend or get a new mortgage.
What is a freehold?
A Freehold property is when you own the building and the grounds it sits on. This includes air space up to 500 feet above your total property.
In short, you’re responsible for all the maintenance of your property, the surroundings and anything that has to do with the property you bought. There are no additional fees to pay, you don’t have to worry about the lease running out and you don’t pay any ground rent, service charges and any other landlord charges.
Should I buy a freehold or leasehold property?
Freehold and leasehold are different for different market buyers. If you want to own your property outright and avoid fees, freehold is for you. However some property types require a leasehold arrangement and these are ideal for first time buyers and those expanding a property portfolio.
The decision to go freehold or leasehold is completely up to you. They carry their own advantages and disadvantages. For those who want to have their forever home, freehold is for you. There is less to worry about and you are solely responsible for the upkeep of the land and property around you.
Leasehold however can be great for those getting onto the property ladder. With payments going to maintenance areas and ensuring that properties are kept in a tidy and managed way. Of course, over time these fees can pile up and you need to be aware of what they are and what it will cost to update your lease after a period of time as well.