Freehold and Leasehold Ownership – What’s the Difference?

Freehold and Leasehold Ownership

 

The two main types of property ownership are freehold and leasehold, although an increasing number of properties are being sold as shared ownership. Understanding the differences is key to choosing the right property for you.

What is freehold ownership?
Freehold ownership means that you own the property and the land that it’s built on outright. As ownership is for an unlimited period, freehold properties tend uphold their value better. The majority of whole houses are freehold.
Outright ownership makes issues such as maintenance much more straightforward as the upkeep of the property is your sole responsibility. Therefore, you don’t have to ask the landlord’s permission to undergo building works or rely on them to maintain any aspects of the property to a standard you’re satisfied with.

What is leasehold ownership?
Leasehold ownership means that there are essentially two owners – the leaseholder and the freeholder. The leaseholder temporarily owns the property for a limited term, whilst the freeholder owns the land that the property sits on. Once the term runs out, ownership of the entire property will revert back to the freeholder.
The leaseholder (sometimes known as the landlord) is usually responsible for maintaining common parts of the building such as the entrance halls, stairs, roof and exterior walls.
There are some considerations that need to be taken in to account when purchasing a leasehold property…

Length of the Lease
When initially drawn up, most leases have a term of 99, or more recently, 125 years. The longer that’s left on the lease, the better the property will hold its value. A lease with less than 80 years remaining can drop in value significantly and you may find it hard to get a lender to give you a mortgage for such a property. When purchasing a leasehold property you must consider how many years are left on the lease and how many there will be if/when you sell it in the future.

Service Charges
With leasehold properties you will often pay a service charge to the freeholder or management company, which covers maintaining and repairing common areas of the property, as well as a share of the buildings insurance and management fees. Ideally a portion would also go towards a reserve fund in case any major repairs need to be undertaken.
Services charges vary and can make a significant difference to the affordability of your prospective property, so it’s best to check this in the early stages of your research.

Ground Rent
Ground rent is the fee paid to the freeholder/landlord for renting the land on which the property sits on. This is usually a minimal amount (£50 – £250) paid on an annual basis. The lease should state how the ground rent is increased, as well as how often.

Obligations
The lease should clearly state the responsibilities of the leaseholder and those of the freeholder.

Restrictions
Generally the leaseholder will have to ask the permission of the freeholder/landlord if they wish to undertake any major building works.

Conclusion
Freehold ownership tends to be far more desirable as being the sole owner puts you in complete control of your property. However, leasehold and shared ownerships provide a more affordable way to get on the property ladder, as long as you fully understand the terms of the agreement and any additional costs.

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