Buying a flat: Leasehold or Freehold?
Here’s a crucial point that every homebuyer should be taking note of: is the property you’re buying Freehold or Leasehold? It seems like a technicality, but this distinction can make a big difference when you’re about to plunge your life savings into this home. In short, it’s the difference between owning property outright – and paying hundreds of thousands to buy a property, only to still have a landlord of sorts.
In this guide, we take a look at the pros and cons of both leasehold and freehold properties.
If you buy a freehold property, that means you will own the building and the land it rests on, forever. This is almost always the best option, as there is little confusion as to who owns what, and who is responsible for what repairs. The answer will always be: you. Your name will go into the land registry as the holder of the ‘title absolute’ and you can pass this property down for generations to come without fear of an expiring lease. The vast majority of houses will be Freehold properties.
- You won’t have to pay any ground-rent
- You won’t have to get permission for any major works done to your property (except from the council)
- You own the property in perpetuity.
- You are responsible for maintaining the building – in particular the roof and the walls. If your home becomes a menace to society due to crumbling masonry or falling roof tiles, it will be your legal and financial duty to make the necessary repairs.
If you own a leasehold property, you have effectively have a long-term lease from the property’s freeholder – who can sometimes be called a ‘landlord’. This entitles you to use the property for the length of the lease which, in practice, can be any amount of time. Leasehold properties are most commonly flats, as they all sit in a building that shares the same ground.
These leases are commonly 90 or 120 years in length, but can commonly run to 999 years – which in many buyers’ minds will make it indistinguishable from a freehold purchase. But even with a lease this long, there are key differences from owning the property outright (see below).
- You will normally pay ‘ground rent’ to the freeholder.
- In addition, you will probably pay annual service fees to cover the maintenance of the property. It’s also likely that you will have to cover a portion of the building’s insurance.
- You will have to obtain permission from the freeholder before you make any major works done to your property.
- Failure to pay fees and ground rent can result in the property being repossessed.
- Once the lease has less than 90 years remaining, the home will start to depreciate quite rapidly. Banks will be less willing to issue mortgages on properties with fewer than 70 left on the lease, so you will want to carefully consider whether you truly want to buy a property on a short lease.
- The property price may be cheaper than if you bought it outright.
- Once you have lived in the property for more than two years, you may have the option of extending the lease by 90 years (for a price).
- You may have the option to work with the other leaseholders in the building and buy the freehold from the current holder. More on that below.
Share of Freehold
A popular ‘third way’ for residential blocks of flats that allows buyers to own their flats in perpetuity. In effect, all the leaseholders in the building will own a share in the freehold. It’s then common for all the owners to set up an association or a private company which will handle the insurance and maintenance of communal areas like the roof and stairwell. The owners of the flats will in effect still be paying for the upkeep of the building, but now they’ll have a say in how it’s done.
It’s pretty common for Freeholders to demand unreasonably high admin fees, or charge inflated rates for insurance and repairs. Share of Freehold owners have a greater incentive to seek out better prices for services and such – so they would likely save themselves quite a bit of money in the long run.
If one of the owners decides to sell their flat, it’s normal for the incoming owner to assume their share of the freehold and accept the terms laid down by the committee.