Have you ben asking: Is it worth buying a leasehold? This article explains the difference between freehold and leasehold property purchases. Find out more about why you might consider buying a leasehold property.
What is a leasehold property?
A leasehold property is one you can own for a set period of time. They are essentially a combination of renting and owning. Once your lease on a property expires, it returns to the original land owner.
There are three main categories of property: owned, rented and leasehold. Most people understand the difference between the first two. But leasehold is a bit more complex. Agreements can be intricate and last a long time.
While renting is temporary and owning is forever, leasehold properties sit somewhere in the middle. Again, you can own a leasehold property, but not indefinitely. Your lease gives you the right to live there longer than a typical tenancy. Most leasehold contracts have a minimum timescale of 40 years but can go up to 120 years and beyond.
Since they are so long, leasehold agreements usually last a lifetime. Allowing someone to live and own property until their lease expires. But why offer a leasehold property rather than selling outright?
Before answering that, there is another factor to consider. That is the difference between "leasehold" and "freehold" agreements. The latter is essentially the same as buying a property. As a freeholder, once you've paid your mortgage, you own the property and the land it stands on.
This is the main benefit of leasing a property. While someone can own the property and live there for many years, they can never own the land beneath it. Once the leasehold agreement expires, the property returns to the original owner.
These agreements are more popular in Europe than elsewhere. Historic landowners wishing to make money from their land without selling it chose to lease their properties. It became a popular form of income for the aristocracy. This then laid the foundations for modern leasehold properties.
Freehold vs Leasehold explained
It will be helpful to examine the difference between freehold and leasehold properties in more detail. These are the two main types of property you'll find listed in England and Wales. The essential qualities of these types of properties include:
LEASEHOLD
Leaseholders occupy properties that stand on a freeholder's land. While you will own the property you lease, it isn't quite the same as being a freeholder.
You will have a lease, which gives you the right to occupy the property for a set period. Again, the length of a lease can stretch to decades or even centuries. But when the lease expires, all ownership of the property returns to the freeholder.
FREEHOLD
Freehold properties and the land beneath them belong to a single individual. These agreements are unlimited (they last forever). Freeholders also own the airspace above their properties in the UK, according to the Civil Aviation Act of 1982. These rights extend to around 500 feet into the air.
Pros and Cons of Buying Leasehold Properties
Given the long contract terms, taking out a leasehold agreement is a serious decision. Before entering into one, you should think about whether it is the right decision for you. Considering all sides of leasehold agreements gives you the best perspective to make the right choice.
Like any serious decision, there are benefits and drawbacks on each side. Learning the pros and cons of leasehold properties can influence your decision. Here we'll take you through these aspects, covering the various fine points of lease holding.
PROS
Leasehold properties are cheaper
Purchasing a property by itself, without the land it stands on, is naturally cheaper. This is one of the main benefits of leasehold properties over freehold ones. Those on a budget who want something more permanent than renting will find this an ideal solution.
This also makes buying properties in affluent areas easier, as land is more expensive than property. If you want to move into an inner city, leasing is much smoother. It also helps you avoid inflated city renting rates.
They are an alternative finance option
Leasehold properties are generally cheaper than freehold ones, even when including the land. You can buy the property and the land at a cheaper price. That is if your leasehold agreement allows it. You will effectively become a freeholder at a fraction of what a mortgage would cost.
This all depends on your agreement. Some leasehold contracts won't let you purchase the land and the property at cheaper annual rates. It is always best to have a property lawyer review your contract before signing. They can tell you whether this is possible for the property you want to buy.
You can own your own home
Leasehold properties provide a way to get onto the property ladder while avoiding the costs and constraints of owning land. Since you will own the property, you can make any alterations or home improvements you want. But you are free from the commitments of owning the land itself.
CONS
Rent is regularly appraised
When you enter a leasehold agreement, the land rent may be more affordable. But as time passes, these rates are re-assessed to match the property's value. If the area you live in goes up in value or experiences a property boom, you may have to pay increased ground rent.
Higher deposits and trickier finance
Leasehold properties require higher deposits than freehold ones. Securing finance for them is also more difficult. This is mainly due to the complex term agreements leaseholders must enter into. Those with poor credit scores may find it impossible to secure the appropriate funds.
One way to give yourself a better chance is through a conveyancing solicitor. They can appraise the property and go through your agreement in detail. With clear information about the leasehold property, you have a better chance of success with your bank or lender.
Increases in land value are lost
Since you won't own the land your leasehold property stands on, you lose out if said land goes up in value. Your landowner will reap the rewards if the neighbourhood undergoes a property boom. The increased land value may also push your rent up.
What are the new leasehold laws?
Historic leaseholders have suffered exploitative treatment from landowners. Improvements to leasehold laws were proposed in 2018. But it wasn't until June 2022 that any serious changes entered UK law. The Leasehold Reform (Ground Rent) Act became law on the 30th of June 2022.
One of the major changes was the introduction of "peppercorn rent". This means ground rent can only increase in nominal amounts. In lay terms, your ground rent will now reflect the actual land value instead of whatever rent the landowner chooses.
Before this law, landowners could include exploitative clauses in leasehold agreements. Some of these stated that ground rent would double after a set period of ownership, with the ground rent increasing further after that. This was unfair to leaseholders and is now abolished. However, this change does not affect lease agreements made before June 2022.
More leasehold law changes are on the way. These aim to improve fairness for leaseholders and transparency for freeholders. One proposed change will make buying a property's freehold easier when leasing. Another change will lift the ban on buying new-build homes as leasehold properties.
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