Leasehold vs freehold: Which should you get?

What is a freehold property?

If you own a 'freehold’ property it means that you own it outright. You own the property itself, and you own the land it’s built on. Most houses are freehold.

You also own the airspace above the property, up to around 500 feet.

What is share of freehold?

This is slightly less common, but ‘share of freehold’ is sometimes used when you buy a flat or apartment within a building. It means you share the freehold with the other flat or apartment owners. Sometimes houses that have been converted into multiple flats are sold with share of freehold.

What is a leasehold?

If you buy a 'leasehold' property it means you don’t own the land it’s built on. This is more common with flats or apartments. Sometimes, shared ownership houses may also be freehold.

You have the property for the length of your leasehold agreement with the freeholder. When the leasehold expires, the ownership returns to the leaseholder. So you only have the right to live in property for an agreed number of years. This agreed time period can be long – it might cover decades, or even centuries. It’s almost like you’re renting from the freeholder for this agreed length of time. A freeholder might let you extend your leasehold when it runs out. But this will depend on their situation and plans, so it’s never a guarantee.

Freehold: pros and cons

As with anything, buying a freehold property comes with pros and cons The advantages of buying freehold include:

• It’s clear cut – there won’t be any disputes as you have complete ownership. You can alter the property and land as you wish (as long as it complies with the law and planning restrictions)

• No time limits – you don’t need to worry about the leasehold running about because it’s yours indefinitely, until you choose to sell it on

• No ground rent to pay – and you don’t have to pay any other service charges or landlord charges either

• No third-party to liaise with – as you are the freeholder, you don’t have a third-party freeholder to deal with

• Investment – it’s a long-term investment.

The disadvantages of buying freehold include:

• Price – it’s more expensive to own the land and the property than it is to just own the property 

• Maintenance – you’re responsible for the repairs and maintenance of the property and the land. You also have a responsibility to the community and local council to be a good homeowner

Leasehold: pros and cons

Leasehold also comes with its own advantages and disadvantages.

The benefits of buying a leasehold property include:

• Price – it’s usually cheaper because you don’t own both the land and the property

• Repairs and maintenance – you don’t have to do it all yourself, so you may find you have less responsibility and fewer maintenance jobs to deal with

• Someone to deal with issues for you – problems such as noisy neighbours can be passed on to the freeholder or their management agency to handle

• Buildings insurance – usually the freeholder arranges this for you. You can find more about what buildings insurance covers here.

• Potential – you may find yourself with the opportunity to buy the property outright later

• Short-term accommodation – sometimes people who need a home for a short period choose a leasehold property.

The downsides of buying a leasehold property include:

• Time limits – when the leasehold expires, the land and therefore the property on it, will be returned to the freeholder unless they agree to renew it

• Charges – you may have to pay ground rent, service charges or other landlord charges

• Restrictions – you might need the freeholder’s permission to make certain types of alterations to the property, for example. Or you might not be allowed to keep pets

• Third party to liaise with – as the leaseholder, you’ll have to be in contact with the freeholder about certain matters

• Hard to sell – it can be harder to sell a leasehold property, especially if there isn’t a lot of time left on the lease

• Harder to get a mortgage – if the lease has less than 70 years left on it, getting approved for a mortgage can be tricky. Lenders prefer the lease to last 30 years later than the final payment for their own security, to make sure the property will retain its value.

Does the length of the lease matter with a leasehold property?

Yes. The length of your lease is an important factor and should form a large part of your decision on whether to buy a leasehold property. 

The part that should interest you is not how long the lease is overall, but how long is left before the lease runs out.

For example, imagine you’re buying a home from an existing leaseholder. The home has a 100-year lease, but they’ve lived there for 40 years – that means you’ll only have 60 years left on the lease when you buy it. The longer left on the lease, the better.

When you look for a mortgage, it might be hard to get one if you’re buying a leasehold property with less than 70 years left on the lease. Lenders prefer a leasehold which will have around 30 years left on the lease after the mortgage is paid off. That’s because leasehold properties with short leases are harder to sell on, so the value would go down. 

Can you extend your lease?

You can ask the freeholder to extend the lease at any time. But you don’t have the legal right to extend the lease until you’ve lived there for two years.

After two years, you’ll have a legal right to extend the lease by 50 or 90 years (depending on whether it’s a house or flat), but only if you’re a qualifying tenant. A qualifying tenant is usually one whose original lease was 21 years or more.

You’ll have to pay to extend the lease. The fee varies depending on the property itself and your negotiations with the freeholder. If you can’t agree on the fee, you might need to appeal to the Leasehold Valuation Tribunal. You may need to pay for a solicitor and surveyor too.

It can be a good idea to ask the current leaseholder to extend the lease on the property before you buy it from them. As long as they’ve lived there for two years or more, and the freeholder agrees, this can be the best way to do it. Be aware that it might take a bit longer before you can buy the house if you do this. 

Another option is to move in and then ask the freeholder to extend the lease, even if you haven’t yet lived there for two years. But you’re at their mercy – it’s their decision.

Be aware that if you begin a new lease, your ground rent might increase.

What is ground rent?

Ground rent is a fee you pay to the freeholder to rent the land from them.

This used to be a token fee, or ‘peppercorn rent’ which would be paid once a year. But, in recent years, some buyers have been subject to ground rent scandals where the ground rent doubles every 10 years.

What to think about before buying a leasehold

The main things to think about before you buy a leasehold property are:

• how long is left on the leas

• how the lease might affect your chance of getting a mortgage

• how the lease might affect your ability to sell 

• the price of service charges, ground rent and any other landlord fees.