If you’re on the hunt for a new home, then leasehold and freehold are two terms you will have come across. These are the two main types of property when buying somewhere in England or Wales. We’ll go over the main differences between leasehold vs freehold, including pros and cons of both.
Leasehold vs Freehold
What is a leasehold property?
When you buy a leasehold property, for example a flat, you own it for the term of the lease i.e. for a set length of time. Depending on the length of your lease, this can be a number of years, decades or even centuries, and once the term of the lease expires, ownership of the property transfers to the freeholder i.e. the person or entity that owns the land.
This means having a longer lease is much more desirable, as the closer you are to the lease expiry date, the less valuable it becomes. A 999 year lease is effectively as good as buying a freehold property, and it can even be more advantageous, but we’ll get to that later. However, shorter leases can be more problematic than you may first anticipate, for example if a lease has only 75 years left on it you may struggle selling, and it could even be hard to remortgage the property.
What is a freehold property?
When you become the freeholder of your home you own the property, the land it stands on and you even have rights to the airspace above your property up to about 500 feet due to the Civil Aviation Act 1982. This kind of ownership is referred to in lawyer lingo as ‘title absolute’ or ‘fee simple’.
The majority of houses are freehold, however it’s always worth double checking when you buy somewhere, and with some flats there may be an option to share the freehold with the management company and your neighbours.
What are the disadvantages to buying a leasehold property?
When it comes to a leasehold, there usually are more cons than pros, but it’s not all doom and gloom, there are a few potential upsides.
The main cons are:
- Restrictions in the lease – e.g. no pets or rules about loud music after a certain time
- Service charges to the freeholder which can increase
- If there are less than 80 years on the lease you may have trouble selling
- Conveyancing fees are often higher for leasehold properties
- A lack of control and independence when making decisions about the property as these will need to be approved by the freeholder
Are there any advantages to buying a leasehold property?
If you live in a shared block of flats then you may benefit from the following advantages:
- The freeholder has responsibility for building insurance and the structure and maintenance of the building. That’s one less thing for you to worry about
- The freeholder is usually also responsible for maintenance of communal areas
- A leasehold property is usually cheaper than a freehold property due to the higher risk
One option for flat owners is also that they can all chip in to buy their freehold and grant themselves 999 year leases, which provides the same security as a freehold property, but will also set out the responsibilities of each of the flat owners. This arrangement combines the advantages of freehold with some of the perks of a leasehold.
What are the disadvantages to buying a freehold property?
Generally speaking there aren’t many disadvantages to buying a freehold property, however a couple include:
- When you’re the freeholder, all costs related to the property are your responsibility. Such as, buildings insurance, repairs and renovations etc
- Freehold properties are more expensive than leasehold as you’re paying for the property and the land it sits on. If you’re a first time buyer on a budget, a flat or apartment may be a cheaper option for you
What are the advantages of a freehold?
- You have complete control over the property and land, as well as the freedom to do what you want with it (to an extent)
- No additional payments such as ground rent or service charge
- No restrictions regarding pets, visitors or sub-letting etc. You can do whatever you legally with to within your property without having to worry about rules
Leasehold FAQs
How can I find out how long my lease is?
This should be one of the first things you should check when buying a leasehold property, and the first few pages of your lease document should identify when the lease was started and how many years are left. If for some reason you don’t have a copy of your lease, you can order one either by post or online from the Land Registry.
How can I extend my lease?
If the lease has less than 80 years left and you’ve owned the property for two years or longer, then you have the right to extend your lease, and the sooner the better as the shorter the lease, the more costly it may be to extend it.
Normally a lease will be extended by 90 years, so for example if you have 80 years left on your lease and extend it, the new lease term would be 170 years.
How much does it cost to extend a lease?
Usually the cost of extending the lease will be 50% of the ‘marriage value’ of the property, i.e. the extra value the property would gain by having a longer lease.
A few other factors may affect the cost of extending the lease, including how much the property is worth and any renovation or improvements that you’ve made to the property whilst living there.
You’ll also need to factor in some additional costs for extending the lease, including Stamp Duty if the leasehold extension costs more than £125,000, Land Registry update fees, legal fees and property valuation.
What else differentiates leasehold properties from freehold?
Although some houses can be leaseholds (particularly if they were purchased through a shared ownership scheme), generally speaking it’s usually flats which are leasehold properties. This means you won’t own the communal areas of the building, for example a communal hall or garden, or the structure of the whole building itself.
Usually, if you’ve bought a leasehold property you will pay fees to the freeholder, however new legislation which came into force on the 30th June 2022 now means that on the majority of new residential leases ground rent charges will be banned, removing the possibility of annual ground rent increases which was previously always something to consider when buying a leasehold property.
In 2023 this government legislation is set to be reinforced, when retirement properties will also have their ground rents moved to zero.
Anything else to know about leaseholds?
Due to the fact that you don’t own the whole building, often a lease will include various restrictions so it’s always worth having a professional legal expert go through the lease with you to make sure you’re aware of any rules, for example no loud music after a certain time or you may not be allowed pets. If these restrictions are broken then you could get into some serious trouble and even be taken to court, so make sure not to skim read your lease!
What are the disadvantages to buying a leasehold property?
When it comes to a leasehold, there usually are more cons than pros, but it’s not all doom and gloom, there are a few potential upsides.
The main cons are:
- Restrictions in the lease – e.g. no pets or rules about loud music after a certain time
- Service charges to the freeholder which can increase
- If there are less than 80 years on the lease you may have trouble selling
- Conveyancing fees are often higher for leasehold properties
- A lack of control and independence when making decisions about the property as these will need to be approved by the freeholder
Are there any advantages to buying a leasehold property?
If you live in a shared block of flats then you may benefit from the following advantages:
- The freeholder has responsibility for building insurance and the structure and maintenance of the building. That’s one less thing for you to worry about
- The freeholder is usually also responsible for maintenance of communal areas
- A leasehold property is usually cheaper than a freehold property due to the higher risk
One option for flat owners is also that they can all chip in to buy their freehold and grant themselves 999 year leases, which provides the same security as a freehold property, but will also set out the responsibilities of each of the flat owners. This arrangement combines the advantages of freehold with some of the perks of a leasehold.
Can I buy the freehold on my property?
If you have owned your home for longer than two years then you have the right to buy the freehold on your leasehold property. It’s advisable to hire a legal professional to do this formally for you, via a First-Tier Tribunal. The Tribunal will decide on the purchase price and terms if you’re unable to come to an agreement with the freeholder.
Get some advice
If you’re after some advice about buying or selling a leasehold property, get in touch with us today for a free chat.
