Buying a property is one of the biggest commitments you’re likely to make. So make sure you understand the key differences between the properties you can purchase - a freehold vs a leasehold.
There are two main types of property you can buy in England and Wales:
- A freehold property
- A leasehold property
Before you decide which one to go for, you need to understand what the key differences between the two are.
Freehold vs Leasehold
When you buy a freehold property, you’re free to do whatever you want with the property, as long as you have Local Authority Planning Permission and Building Control Authority. You own everything - the building, everything inside it and also the land that it sits on.
With a leasehold, you’re leasing (or hiring) the property for a set amount of time (this can be anywhere from 40 to 999 years). This means that you are likely to be required to pay Ground Rent, and you’ll have a contract with the owner of that building and land (the freeholder) which will set out what you are and aren’t allowed to do with it.
Get a free conveyancing quote for a freehold or leasehold property or read on to find out more.
Which is Better, a Freehold or a Leasehold?
When you’re making the decision to go with a leasehold or a freehold property, you need to weigh up the advantages and disadvantages of each and decide which one would fit your situation the best.
Buying a Freehold Property
The biggest advantage to buying a freehold is the freedom it gives you. The property is entirely yours to do whatever you like with. For instance, with a freehold you can usually have pets, run a business, rent the property out (providing your mortgage conditions allow for this) and make as many building renovations as you like, subject to building control and planning permissions.
You also have greater control over what and how much you spend on it. There are no rising costs associated with the property (other than bills etc.), no hidden expenses and no surprise charges.
Plus, having this level of control over your property means that the money you spend on it could add to its value.
A common disadvantage to purchasing a freehold is the amount of money you’ll have to spend upfront to secure the property. At a minimum, you’ll usually have to pay the following:
- A deposit
- A building survey
- Legal and valuation fees
- Building insurance
- Stamp duty land tax (if the purchase price is over £125,000)
You’ll be responsible for the upkeep, cost of repairs and updates to the building itself.
Buying a Leasehold Property
When you lease a property, the freeholder will usually be responsible for maintaining the common parts of the building. So, areas like the entrance hall, staircase, exterior walls and the roof. But, you will have to pay a share of these maintenance costs.
Also, because leasing is common with flats, it often means that you’ll get access to perks like in-house gyms, discounted shops, communal gardens and onsite parking. The costs of these perks are usually paid for in your management fees.
If you decide to lease a flat, you could also buy a share of the freehold, along with the other leaseholders in your block.
Each person would still be leasing their home, but the new entity that you’ve formed with the other building occupiers will jointly own the freehold. This gives you and your neighbours greater control. You could collectively set ground rents, get the best insurance deals and hire cheaper maintenance companies to service the communal areas.
One of the biggest disadvantages associated with leasing a property is the cost. Costs such as admin fees, the contributions towards building repairs, service charges and ground rent can sometimes escalate without much warning.
Rising ground rents are a common problem for leaseholders. To stop it from happening to you, make sure your contract stipulates that the ground rent cannot be increased. And make sure it can’t be sold to another third party. Third parties are renowned for increasing ground rents on leasehold properties by extortionate amounts. If this happens, you’ll find it difficult to sell your property because the ground rent costs will be too high.
Another disadvantage of a leasehold is that the less time you have left remaining on your lease will affect the value of your property. It will be more difficult to sell and most mortgage companies won’t lend on a leasehold property with less than 70-80 years remaining on the lease. When the lease gets to around 90 years, you need to start thinking about whether to sell it or renew it.
If you wanted to renew your lease it is likely to cost you around 50% of what’s known as the ‘marriage value’ of the property. The ‘marriage value’ is the increase in value of the property after you’ve extended the lease (remember the less time you have on your lease the less valuable the property is).
The total cost of extending the lease may also depend on:
- How much your property is worth
- How much ground rent you currently pay
- Legal fees
- Land Registry update fees
- Stamp Duty (but only if the leasehold extension costs over £125,000)
Shared Ownership Property
The costs associated with a freehold and a leasehold can sometimes make it difficult to purchase, especially if you’re a first-time buyer. But there is another option to consider if neither a freehold nor a leasehold suit your situation.
Shared Ownership is a government-run scheme that gives you the chance to buy a share (usually from 25% to 75%) of a property. You’ll pay a mortgage on the share you own, and you’ll pay rent to a housing association or private developer, for the remaining share.
The rent you’ll pay on the remaining share of the property is normally at a discounted rate (it’s usually 2.75% of the property value), and because you only pay a mortgage on the share of the property you own, you won’t need as much deposit. Stamp duty can often be deferred until you increase your share of the property to 80%.
You will have the opportunity to increase your share in the property, even up to 100%, through a process called ‘staircasing’ which will increase your share in the property, whilst decreasing your rent.
But shared ownership properties are often leasehold properties, so you might also have to pay service charges and contribute to maintenance works.
And, there are some eligibility requirements that you’ll need to meet to secure a Shared Ownership property:
- You must be over 18
- Your income must be less than £80,000 (£90,000 if you live in London)
- You either need to be a first-time buyer or be in the process of selling your home if you’ve already purchased a property
- You must prove that you’re not in mortgage or rent arrears, have a good credit history and can afford the regular payments and costs involved in buying a home
To find out more about this scheme, contact our Property Solicitors. We can talk you through how it all works and help you with the Shared Ownership process.
Regardless of whether you decide to buy a freehold, purchase a leasehold or go with a shared ownership property, the process for all three can often get complicated. You’ll need to know exactly what you’re signing up for and everything needs to be laid out in clear, simple terms.
This is exactly what we can do.
Simpson Millar Solicitors are a national law firm with over 500 staff and offices in Billingham, Bristol, Cardiff, Catterick, Lancaster, Leeds, Liverpool, London and Manchester.