You’ve probably come across the terms’ freehold’ and ‘leasehold’ and thought it was some legal jargon that doesn’t really mean much. But, it is crucial to know the difference if you’re looking to buy a property.
You may be asking, “When you buy a property, you own it, and that’s it, right?” Well, you’d be somewhat correct. You’re correct in thinking that you own the property but wrong in that it depends on how long you have purchased ownership.
Whether the property you’ve bought is freehold or leasehold will determine if you have ownership of the property forever or only for a set amount of time. Sound confusing?
To clarify it all, in this article, we’ll explore what freehold means, what leasehold means, the advantages and disadvantages of both, and much more.
What does freehold mean?
Freehold property is one where you own the property and the land that the property is sitting on, outright and forever. In the HM Land Registry, this type of ownership is noted as ‘title absolute’ and is in your name as the ‘freeholder’. The property owner is responsible for everything related to the building and the land.
When you’re looking to buy a house, typically, it will be a freehold property. However, there are cases of leasehold houses, particularly for new builds. Most flats and apartments will be leasehold since you own the section of the building you live in but not the land it’s built on. However, in some cases, you may be able to have a share of freehold with other flat owners in your building via a management company.
What are the advantages of a freehold property?
There are numerous advantages of owning a freehold property. The main one is that you have complete freedom over the property and the land it’s on. You won’t have to adhere to any rules a landlord sets, such as being unable to make changes to the decor, having pets in the house, or undertaking any building work on the property. As long as your changes are within the law, you have total freedom to do as you wish.
Also, there’s no fear of having to move out or expensive lease renewal. Leasehold properties come with a lease term, whereas you own freehold properties outright and, thus, for as long as you want.
Furthermore, you won’t have to pay maintenance fees, service charges, admin fees, or pay ground rent that leasehold owners are subject to. This means that you know exactly what you’re paying for the property when you buy it instead of having additional fees to keep up with each year.
What are the disadvantages of a freehold property?
It may seem like a no-brainer to opt for a freehold property, but there are some distinct downsides. First and foremost, freehold property prices are usually much higher than leasehold properties. Being an outright owner of the land and the property means you will have to pay a premium which can often be out of many people’s budget.
You also get none of the benefits that come with living in an apartment complex, such as a gym, concierge, social area, receptionists, etc. If these amenities are things you can’t live without, then a freehold property may not be the right choice for you.
What does leasehold mean?
A leasehold property is one where you own the property but not the land that it sits on. Additionally, you possess ownership of the property only for the duration of the lease agreement that is made with the freeholder – essentially your landlord. There is a possibility of extending the lease. However, terms and conditions would have to be agreed upon with the freeholder.
What are the advantages of a leasehold?
One of the significant benefits of a leasehold is that it is considerably cheaper than freehold properties. As you only own the section of the building you’re living in, the price will be much lower. Also, many new apartment complexes and flats have perks such as a gym, swimming pool, parking, etc., which can make your life extremely convenient. This is in addition to the fact that it is the freeholder’s responsibility to maintain the communal areas of the building, so you have less to worry about.
What are the disadvantages of leasehold?
The main disadvantage is that you only own the property for the agreed lease term. Since you cannot make any changes to the property and the land it’s on without prior approval from the freeholder, to some people, it can seem more like renting a property rather than owning it.
Additionally, there are various additional costs involved with a leasehold property. Almost all leaseholders have to pay fees to the freeholder, such as annual ground rent, buildings insurance, maintenance fees, conveyancing fees, etc. This can make leaseholds quite pricey. Also, leaseholds are most common with flats and apartments, which limits your options when it comes to the location you wish to live in.
How long can a lease be?
A new leasehold property can be anywhere from 99 years to 999 years. This variance will be a determining factor in the cost of a leasehold property, with shorter leasehold terms being cheaper than shorter ones.
For leaseholders who have lived in a flat for a minimum of two years, they have the right to purchase an extra 90 years on their lease. For instance, suppose you have 115 years left on your lease term. You can purchase an additional 90 years, making your new lease term 205 years. You can also negotiate with the landlord to increase the lease term by any number of years, as long as you both agree on it.
Most freeholders will attempt to keep the lease term above 80 years at all times. This is because if a property has less than 80 years left, it can make the property difficult to sell eventually.
What is owning a share of freehold?
Owning a share of a freehold means that you are a part owner of a freehold property. An example of this would be when leaseholders in a block of flats come together to buy the property off the freeholder.
To own a share of freehold, you and other leaseholders would need to create a company to manage the building. Alternatively, you can hire a management company to oversee this for you.
Owning a share of freehold will give you more control over the property itself, what changes are made to the land it’s on, how to allocate resources to fix damages, how much ground rents cost etc. It will also make it incredibly easy to extend your lease to as long as 990 years, ensuring you won’t be left without a home.
However, you may find yourself at odds with the other leaseholders. There can be differing views on how to arrange repairs, who pays for them, how to manage your budget, etc., which can cause friction.
Can you get a mortgage for a share of freehold?
Mortgages are challenging to obtain as it is, and it can be increasingly difficult for a share of a freehold property. There are fewer lenders to choose from since not every mortgage lender offers mortgages for freehold flats. If you do find a lender, you will still have to go through the same hoops as when applying for a traditional mortgage, so it’s crucial to have your credit rating and finances in order before applying.
What is a freehold reversion?
A freehold reversion is when the lease on a leasehold property is about to run out and will revert back to a freehold property at the end of it. The term is usually used when describing a property that is on sale.
Suppose you are looking to buy a property and it is listed as freehold reversion. If you purchase the property, the freehold should belong to you once the lease ends.
However, each contractual agreement between freehold and leasehold properties is different. There can be large amounts of variation in regards to the transfer of ownership and terms and conditions. Therefore, it’s best to thoroughly examine the contract before making a freehold reversion property purchase.
What is commonhold?
Commonhold falls under the umbrella of freehold and works similar to a share of freehold. It was introduced in 2002 to address some of the drawbacks of leaseholds.
Commonhold is when a building with multiple occupants, such as an apartment complex or flats, is divided into separate and distinct freehold units. The common parts of the building, such as the entrance hall, staircases, lifts, and land, are owned by a commonhold association. The commonhold association is owned by the individual freeholders in the building who are put in charge of managing the building, maintenance, servicing, etc.
As with a leasehold, the individual freeholders are responsible for their own flats or apartments. However, the difference is that there is no lease term, and it’s a joint effort by the freeholders to ensure the smooth running of the property. Additionally, anyone who owns a freehold property within the building has the ability to join the commonhold association.
Final Thoughts
There are two primary forms of property ownership – freehold and leasehold. Freehold means that you own the property and its land outright. Leasehold means that you only own the property for a fixed time period and is more common with flats and apartments.
They both have pros and cons. Freehold properties give you complete freedom in how you choose to make changes to them but are considerably more expensive. On the other hand, leasehold properties are much cheaper but come with additional fees such as ground rent.
