Buying a property in the UK - freehold or leasehold?

In the UK, there are many ways to own property. Although most people acquire full ownership of their house or flat, you may also come across what is known as leasehold. To dispel the prevailing myths about this and make your decision easier, in this article we’ll look at the differences between freehold and leasehold and see which is more worthwhile.

Understanding the difference between these two, quite different types of possession is very important even before buying a property, as it will affect our subsequent expenses and determine the degree of your responsibility for the property you are purchasing.

What is a freehold?

Let’s start with the more popular option when buying, which is freehold. Owning a property on a freehold basis means that you own both the building and the plot of land on which it stands. It’s an intuitive model where, when you purchase a property, you take over all the rights associated with it.

When you buy a freehold home, you will be responsible for looking after everything about the property, from your items inside, to the fixtures and fittings and structural elements, to the land on which the building sits. All repairs and alterations to the building and its surroundings will be funded out of your pocket.

Freehold is a greater responsibility, as the onus is on you to bear all the expenses associated with the upkeep and maintenance of the property. At the same time, it’s also more freedom - you don’t have to pay anyone for the use of the plot, although you will of course be obliged to pay taxes. You also have the right to modify the structure of the house, add an extension or install photovoltaic panels on the roof, although of course this must be done in accordance with the law, both national and local.

What is a leasehold?

In the case of a leasehold, you only become the owner of the building, but not of the plot of land on which it is located. The land you lease may belong to another person or institution and the agreement allowing you to use it is usually for the usual 99, 125 or 999 years (source: Leasehold vs freehold: what’s the difference?). In practice, many properties end up on the secondary market with a lease term of 90 to 120 years.

Shorter leases become problematic faster than you might think. If there are less than 80 years left on the lease, this can make the property difficult to sell and may even be difficult to remortgage. The lease term can be extended, but this is often quite expensive and requires goodwill on the part of the landowner.

When choosing this type of property, you need to be aware that:

When the leasehold expires, ownership of the whole property will revert to whoever owns the land, unless you extend the lease. Therefore, if the leasehold is not renewed, you will lose your home.

Source:Leasehold vs freehold: what’s the difference? Moneyhelper.org.uk

The aforementioned ground rent also costs money. Usually, the fee is charged once or twice and, although it is not very high, you need to include it in the overall cost estimate for the purchase as it will burden your household budget for many years.

If you decide to buy a leasehold property, there is also likely to be another, this time much higher, cost. Common charges, known as services charges, are imposed primarily on flat owners, but residents of some houses will also be required to pay them. The money collected goes to pay for the bills for lighting in the common areas, care of the surrounding greenery, repairs to the building, insurance policy, etc. When choosing a home, be sure to pay attention to the service charges at the very beginning of your conversation with the existing owner - the amounts can be really large.

Finally, leasehold restricts some of your rights - you will need to apply for permission from the landowner to carry out major renovation work. Sometimes leaseholders do not have full freedom when it comes to keeping pets in their four walls, although this is now somewhat less common.

Although leasehold is primarily associated with flats and flats, this has not always been the case - many older homes built in England, Wales and Northern Ireland are leasehold. In recent years, this trend has resurfaced, but in 2019, the UK government has banned the sale of new leasehold homes, forcing developers to switch to freehold. In our view, this is a very positive change as it gives you much more freedom.

Can a leasehold land lease be renewed?

The law does not impose any restrictions on this - you can apply to the landowner for an extension of the lease at any time. If both parties come to an agreement, the residential lease can be extended up to 90 years or by 50 years in the case of a leased house (source: Nerdwallet.com).

The cost of renewing a lease varies depending on the type of property, its location and the current contract.

Can I buy ownership?

If you are a leaseholder, you may want to consider buying out the freehold of your property, thereby switching from leasehold to freehold. For example, if the property is a flat, you could buy a share of the freehold that would have been owned by other flat owners. If the property is a house, you could buy all the land.

However, the process itself can be long, expensive and complicated. If you want to undertake it, however, we strongly recommend that you use a lawyer - this will save you from the possibility of making very costly mistakes that are sometimes difficult to undo.

How much does it cost to buy land outright?

The cost of buying land outright varies significantly for a number of reasons, as do house prices. In practice, the shorter the lease, the more expensive the move to freehold will be.

Buying land can be a very complicated process, especially if there are multiple tenants involved. It is therefore important to seek independent legal and financial advice before undertaking this task to avoid costly mistakes. Sometimes, it may be more cost-effective to buy another property and abandon plans to convert its legal status.

Advantages and disadvantages of both solutions

Advantages of buying a freelhold property:

• Full ownership: You will have full ownership of the property and land and no encumbrances once you have paid off your mortgage;

• No fees: You will not have to pay ground rent, service charges or administration fees to the landowner;

• Flexibility: You can do what you want with your home. For example, have pets or make home improvements, subject to local council permits;

• No lease: You don’t have to keep track of when your lease ends or pay to renew it, which can be very expensive;

• Greater mental comfort: You don’t have to wonder if you will be able to renew your lease for the next several years. No one will chase you out of your own home once you have paid it off.

Disadvantages of buying freehold property:

• High price: freehold properties usually cost more because you are buying both the property itself and the land on which it is built;

• Limited choice: freehold properties are generally houses, if you are looking to live in a specific location (e.g. a city centre) there may simply not be a freehold property there;

• Maintenance costs: we are responsible for the maintenance of the entire property and for paying the buildings insurance.

Advantages of purchasing a leasehold property:

• Lower purchase price: leasehold properties are usually cheaper than freehold properties. One important factor is that when buying a leasehold property you are not buying land. A second important aspect affecting the lower price is the risk involved in such a purchase;

• Less liability: The landowner usually manages the maintenance of the building and common areas and arranges insurance for the buildings;

• Attractive location. Flats bought on a leasehold basis can have an attractive location close to the centre, often nice, modern flats with easy access to a variety of shops, restaurants, gyms, etc.

Disadvantages of buying a leasehold property:

• Limited ownership: buyers do not have sole ownership, they only buy the property, while the land is owned by someone else;

• Rent and fees: In addition to the mortgage, you will have to pay ground rent and charges for common costs, which can increase. If you are unable to pay these costs, you could potentially even lose your home;

• Restrictions: You will need written permission from the landowner to make changes to the property and you may have to pay additional fees;

• No animals: Some leasehold properties prohibit owners from having pets;

• Prohibition of business: You may not be allowed to run a business from your home;

• Transfer fees: These tend to be more expensive for leasehold properties;

• Selling: It is harder to sell a property with a shorter leasehold, which means you may miss out on gains from rising property prices.

Summary

We hope you find this information helpful and that it will help you make a better decision about buying a freehold or leasehold property. Whatever your choice, Extend Finance team can help you get the right UK mortgage and the whole process of buying a house or flat.

Feel free to get in touch if you need assistance in this area. We work together completely remotely and are able to assess your creditworthiness within an hour, answer any questions you may have and begin the process of finding a mortgage that is perfectly tailored to your needs and requirements.