Leasehold or freehold: What’s the difference?
The two most common forms of property ownership in the UK are freehold and leasehold but what do these terms mean in practice?
With leasehold you are buying for a fixed period, usually 99 years if the home is new though leases can be much shorter. However, you do not own the land the property is built on, the rights to which stay with the freeholder. Flats are almost always leasehold and often come with charges to the freeholder or their agents for service, maintenance or ground rent.
According to the Land Registry, in the 10 years to 2017 the proportion of leasehold properties being sold almost doubled from 22 per cent to 43 per cent of transactions.
It is important to remember that seemingly modest ground rents can rise substantially over a period of years so it is a good idea to find out through your solicitor what the rental projections are on any leasehold purchase. Campaigners have suggested capping ground rents at a tiny percentage of the property’s value to avoid unexpected rises.
A drawback to leasehold is that due to the set amount of years of ownership they are technically a dwindling asset. As the lease period diminishes, particularly beyond 80 years, the property may become harder to sell or obtain a further mortgage on. This raises the question of whether a leaseholder should extend their lease, which can cost anything between about £8,000, including fees, to tens of thousands. However, it adds value to the property.
Consumer groups have advocated extending leases but warn that you must take into account the costs incurred by legal advice, the lease extension valuation report by a surveyor, your freeholder’s reasonable legal and own valuation costs, which you are required to pay by law, and Land Registry fees.
Freehold is a more attractive option because it means you own both your property and the land on which it stands without any time limit or maintenance charges. Most houses are freehold though there has been a controversial trend of selling new-build homes on a leasehold or part-freehold basis.
Leaseholders have the option to buy the freehold. Some developers of new-build houses have been reported as giving freeholds to buyers for nothing so it is worth asking what terms are available.
Obtaining the freehold on a flat is more complicated but it may make financial sense over the long term if you are saddled with high charges. Essentially you would need to join forces with other leaseholders in your block to approach the landlord with a view to each buying a share of the freehold. This would involve the formation of a company between the tenants that would hold ownership in what is known as commonhold, with all flats in effect being leased from it.
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