If you are looking forward to acquiring a property, you need to be acquainted with the common ownership structures. Luckily, this article will give you the much-needed info regarding the differences between these structures as well as how they will affect you.
Before buying a property in any region, you have to identify whether its freehold or leasehold. Both commercial and residential properties can be leasehold or freehold in most countries. After understanding the type of property you are getting, you will have an easy time recognising your responsibilities and rights about property ownership.
Now, read on to find out much more about the differences between leasehold and freehold properties and the things you need to consider when buying a property on either.
What is Freehold?
When you purchase a freehold property, it basically means you wholly own the property as well as the land it sits on. However, the mortgage company may repossess it if you fail to make their payments. This type of ownership is also known as ‘fee simple’ and, in some cases, the ‘title absolute.’
In this type of ownership, you have to cater for all fees linked to the property, from building insurance to repairs. Typically, you do not have to pay for the maintenance expenses unless you share some basic services with your neighbours, such as communal gardens.
While most homes are freehold, it is always advisable to check this before buying. When it comes to some flats, the management company may require you to share the freehold with some of your neighbours.
The Benefits of Freehold
There are several benefits linked to being a freehold owner. Below are the pros:
- The owners are the landlords themselves, so they do not have to deal with any landlord.
- A freehold is free from ground rent, service charge and other landlord fees.
- There are no lease fees and deadlines to worry about.
- You have flexibility in selling the property, making it easy even to rent it out.
- Property owners don’t have to worry about any property expiration.
- Getting a mortgage loan is easier than a leasehold.
What is Leasehold?
When you acquire a property on leasehold, it means you will own it for a specific period of time, which is usually the specified lease term. After the expiration of the lease period, the property’s ownership will return to the owner. While the leasehold is extendable, it’s worth noting it always follows some specific terms and conditions.
Keep in mind that regardless of the money used to buy and maintain the property, you will still lose it at the end of the lease period. Currently, most of the flats and apartments in the country are acquired via leasehold. With this type of ownership, you have the right to own the building, but you don’t have the ownership of the land on which the property sits.
What are the Perks of Leasehold Properties?
There are several perks of a property being a leasehold, particularly when it’s on a shared block of flats. Below are the pros:
- Due to the risks involved, a leasehold property is often cheap.
- The owner is responsible for the maintenances of the communal areas.
- The owner will cater to property insurance.
- The owner takes care of the building’s repairs and maintenances.
Top Things to Consider When Buying Leasehold Property
Here are the essential things to consider when buying a leasehold:
- You have to assess the number of years remaining on the lease.
- It is recommended to check how the length of the lease affects the property’s resale value.
- You have to invent an efficient budgeting method for service expenses and other charges.
- Assess whether the length of the lease has got any effects on your chances of acquiring a mortgage.
How Essential is the Length of a Lease?
Whenever a lease is set at less than 70 years, getting a mortgage becomes an uphill task. Usually, lenders require 25 to 30 years for a mortgage to be fully paid. Therefore, if you want to acquire a 30-year mortgage, the lease must be between 55 to 60 years before its expiration.
On the other hand, selling a property that contains a lease of fewer than 80 years is tricky. So, if you ultimately want to sell a leasehold building you are acquiring, you need to think of the number of years left on the lease.
If Buying Leasehold How Long Should Lease Be?
In simple terms, a lease is a legal document that tells you the number of years you are eligible to stay in a property and what you need to cater for regarding maintenance and insurance. Although the residential leases often last for 125 years, it is possible to get a lease that lasts for 999 years.
Generally, having a long lease is much better as it makes it easier to sell the property. It is worth noting that your property’s value declines when you include a lease of fewer than 80 years. Yes, a lease comprising of less than 80 years can substantially affect your property’s value as well as the amount you will have to pay to prolong the lease.
A large percentage of mortgage providers will not give out loans on properties with less than 80 years left. So, you should always check on the number of years presently left on the lease when acquiring a leasehold property. Additionally, check the number of years that will likely remain by the time you decide to sell the property.
Extending and Renewing a Lease
If you have owned a property for more than two years and the number of years left on the lease is less than 80, you have got the option to prolong it. As a general rule, it is advisable to extend on the early years because prolonging it in the later years may be pretty expensive. The best and effective way of extending a lease is to inquire the seller to prolong it even before the property acquisition.
In most cases, extending a lease requires you to extend it by at least 90 years. For instance, if you have got 60 years left on the lease and decide to extend it, the new lease term will read 150 years. Prolonging a lease is common. Thus, a property lawyer can handle the entire process on your behalf. The fees for extending the lease may depend on the following factors:
- The enhancements done on the property
- The property’s worth
- The amount of money paid for the ground rent
- Legal expenses
- Stamp duty
- Land registry update fees
Service Charges and Sinking Funds
As said earlier, being a leaseholder only lets you own the property and not the land the property sits on. This means you will not have the mandate of maintaining the property structure as well as the communal regions shared between the flats in the property. In its place, the landlords will have to pay for the maintenance expenses of the shared regions. Ideally, the landlords hire realtor agents to run and manage the property on their behalf.
Now, when buying a leasehold property, it is worth noting that the monthly mortgage payments will not be the only ongoing fees you will have to pay. Yes, you have to pay for the service fees, and this may increase your monthly expenses. When you get a leasehold building, be ready to pay a service fee to the managing company or the landlord to maintain the property’s common areas.
The charged amount will cater for the cost of supplying the essential services to the property. Also, landlords may use it to hire a managing agent to do so on their behalf. The older leases used to contain fixed service fees that needed to be paid yearly. Still, the current ones incorporate ‘variable service fees’ that lets the management estimate the yearly costs. With this, the management can raise the charges to finance a substantial one-off expense, such as upgrading a fire alarm system or renovating a lift.
What is the Price of Service Charges?
Well, you must determine the price of the service charge before purchasing a leasehold property. The reason for this is that the lender will consider this when applying for a mortgage. The lease will give full details on the amount to pay as well as what you are paying for. The charges vary significantly from one lease to the other.
What are Sinking Funds?
Also known as a reserve fund, it covers any substantial or costly works needed in the building. Although not all buildings comprise this funding, those that do requires the leaseholders to contribute to the huge structural repairs and maintenances.
Overview of Ground Rent
In the United Kingdom, ground rent is historically an amount paid to the landlord as a part of leasing the land the property rests on. When it comes to the old properties, the ground rent is typically paid yearly and is regularly a fairly low amount. Keep in mind that this charge can either be fixed or increase over the long run.
Fortunately, after extending your lease, the ground rent reduces to zero. Previously, it was impossible to enforce the lease terms of service if there was no ground rent specified on the lease. For most leaseholders, ground rent is not a major worry.
What are Your Rights as a Leaseholder?
If you recognise your rights as a leaseholder, you will have an easy time identifying any financial fraud that may come your way. Below are some of the rights you have as a leaseholder:
- It would help if you asked the landlord for the service expenses for your peace of mind.
- You can ask the landlord to give you the invoices or receipts of the repair works done on the property.
- Inquire from the landlord about the approximation method of the service fees.
Making the Right Decision
When all is said and done, determining between a freehold and leasehold property does not necessarily depend on the property’s price. Instead, the buyer’s spending power must be at the top of the list. While not all leasehold buildings are affordable, buying a freehold building, especially in a prime area, may need a significantly high amount of money.
Although the properties in the prime regions may seem costly due to their location, the ease of accessibility is something that all buyers need to consider when purchasing a property. A building in one area may be affordable, but you may incur extra expense in general car maintenance and gas if you travel to another city for work daily.
As a buyer, it is worth noting that there are insufficient freehold properties in the prime areas. Therefore, if the factors between a freehold property and a leasehold property are equal, you should opt for the former. All in all, the property’s land tenure does not have to be the only deciding factor when buying a property.
If you plan to purchase your first property, one of the best things to consider is house affordability and your objective. Some of the considerations may entail the available cash at hand, monthly income and the amount of money you can borrow at the given time.