Leasehold & Freehold: The Differences Explained
Updated: Mar 12, 2021
It's really quite simple you'll be glad to here... If you own a property in the UK it will either be one or the other, Freehold or Leasehold and there are pros and cons to both. So let's dive into the differences and how they could affect you.
The Definitions of Leasehold & Freehold
When you buy a property that is leasehold, you own it for a set length of time, this is the term of the lease on the property. Once that lease runs out, ownership of the property transfers back to the person or business that owns the land. (known as the 'freeholder'.)
This sounds awful, but in reality it doesn't ever hardly happen, as leases tend to be renegotiated for a sum of money. Most leases on new-build properties start at 999 years, so it's good to go, at least for a few generations.
You may notice some properties for sale and the advert states 'cash buyers only' now sometimes this could be due to the leasehold running below 80 years. The reason is that banks often won't look at giving you a mortgage on a property if it's leasehold term has less than 80 years to run.
How You Can Benefit As An Investor with Leasehold Properties
Leaseholds running low can offer an investment opportunity to some investors. Why you might be thinking? Well, there is always the option of renegotiating the lease with the freeholder and adding value to the property. In some scenarios you might have a property that is on the market and it's below the current market value (B.M.V.) due to it having a short lease. (less than 80 years)
You could in this scenario, buy with cash, renegotiate the lease (when possible to do so) and then refinance, sell on, or even keep it as a buy to let, with a good amount of equity.
However there is a cost to extending the lease and in most cases you would have to have owned the property for two years or more, before you are able to negotiate an extension to the lease. You will need to check this on the lease itself.
Another option is you could negotiate to buy the freehold from the existing freeholder!
Just remember, the lower the lease has left to run, the lower the value of the property!
You can find out how any years are left on a lease by:
Asking the selling agent or you can order a copy of the property lease from the land registry online. This should also give you the details of the freeholder too.
Leasehold also means that you do not own the land the property is built on. Most leasehold properties are flats/apartments, although some new-build houses can be leasehold too.
Ground rent is often payable on properties which is usually a 'moderate sum' paid to the owner of the freehold or management company.
A leasehold may dictate certain conditions such as;
no pets allowed
no reconstruction or major works carried out on the structure of the building
you cannot run a business from home
If you break these conditions you could be taken to court and risk losing your lease altogether.
Another thing worth noting is conveyancing fees, can be higher when buying leasehold properties - due to the extra paperwork involved.
When you buy a property that is freehold you own the building and the land that it is built upon, up to the boundaries on the title of the property.
Most houses are freehold, but in recent years developers have been known to build housing that is leasehold and put a huge price on extending the lease!
Before you Buy Any Property...
Always check if it's freehold or leasehold and if it is leasehold you need to ask these questions below:
How long is remaining on the lease? (you don't want it to run down to 80 years in your lifetime.)
Is their any ground rent payable on the lease, and if so how much is it per year?
Where You Can Find Low Running Leasehold Properties?
You can often find these properties at online auctions and also for sale for a lot less than similar properties near-by. They will almost always say that they are looking for cash buyers only: due to them being un-mortgageable.
If you enjoyed this, be sure to check out my other property blogs.