Freehold vs Leasehold. An introductionBut firstly my name is Dan, I am a CeMAP qualified mortgage & protection adviser. This video is purely for educational purposes only, and should not be seen as advice or a recommendation to act and I must stress your home may be repossessed if you do not keep up with the repayments on the mortgage.
Grab a drink, sit back, and relax. I will hopefully cover off the basics of the differences between Freehold and Leasehold, and I will put a link in the description below to a helpful website that will cover these points in finer detail.
In this video, I will break down the ways you can own a property as a freehold, leasehold, or leasehold with a share of the freehold. I will also cover the costs and responsibilities involved with each and how they affect what a property will cost you to buy and sell.
What is a freeholder?A freeholder is a person or company that owns a property and the land outright. When you own the freehold, you’re responsible for maintaining the property and the land, so you’ll need to budget for these costs. Most houses are freehold but some might be leasehold – usually through shared-ownership schemes. Check with the estate agent before purchasing whether the property is freehold or leasehold, as this can sometimes affect which lenders you can apply to.
The benefits of being a freeholder are that you don’t have to worry about the lease running out, as you own the property & land outright. Or deal with the freeholder. You also do not need to pay any ground rent, services charge, or any other charges such as administration fees.
You can buy the freehold from the existing freeholder, along with other leaseholders such as other people living in the same block of flats as you. You can only do this if at least half of the leaseholders agree to buy a share. Doing this gives you more control over your home and the costs. If you wanted to buy the freehold from the existing freeholder, you would have to serve a Section 13 Notice. I can provide more information on this in the video description below. But be wary, that it can be expensive to buy the freehold. If you were a leaseholder of a property in a block of flats, you and the other leaseholders will also need to set up a company to manage the building or find a managing agent to do it for you.
If you lived in a block of flats, you can form a commonhold association with other property owners and you would own the land, building, and common areas and it is responsible for the management, maintenance, repair, and servicing of these areas. Like a leasehold, owners are responsible for their individual flats or houses. But, unlike leaseholds, there is no time limit for how long you own the property. Anyone who owns a freehold in the building or estate is entitled to participate in the running of the commonhold association.
What is a leasehold?With a leasehold, you own the property, for the length of your lease agreement with the freeholder. When the lease ends, ownership returns to the freeholder, unless you can extend the lease. Most flats and maisonettes are owned as leasehold, so while you own your property in the building, you have no ownership of the building it is in. Some houses are sold as leaseholds. If this is the case, you own the property, but not the land it sits on.
Buying a leasehold property When you buy a leasehold property, you’ll take over the lease from the previous owner. So before making an offer you’ll need to consider, how many years are left on the lease, how you’ll budget for service charges and related costs, and how the length of the lease might affect getting a mortgage and the property resale value.
Is the length of the lease important?If the lease is for less than 70 years, you might struggle to get a mortgage. Lenders will normally need around 25-30 years beyond the end of your mortgage. This means if you want to get a 25-year mortgage the lease needs to have at least 50-55 years before it ends. It can also be difficult to sell a property if the lease is for less than 80 years. If you eventually want to sell a leasehold property you’re buying, think about how many years will be left on the lease.
Extending the lease to your propertyYou can ask the freeholder to extend the lease at any time and once you’ve owned your home for two years, you have the right to extend your lease by 90 years, provided you are a qualifying tenant. Usually, you will be a qualifying tenant if your original lease was for more than 21 years. The freeholder will charge for extending the lease and the cost will depend on the property. If you and the freeholder can’t agree on the cost of extending the lease, you can appeal to the Leasehold Valuation Tribunal. You might need to hire a solicitor and surveyor, which will increase the cost.
If you own a leasehold property, you don’t own the land that the property sits on. This means you won’t be responsible for maintaining and running the building. The freeholder will do this or appoint a managing agent to do so for them. However, the leaseholders share the costs of this by paying a service charge to the freeholder. You might also be asked to pay into a sinking fund, to help cover any unexpected maintenance work needed in the future.
What are service charges?Service charges vary from property to property. They are to cover the costs of things such as maintaining the communal gardens, electricity bills for communal areas, and repair and maintenance of exterior walls. Make sure you’re aware of the service charges before you put in an offer on a property as it might affect whether you can afford to live there.
If you own a leasehold property, the repairs and maintenance on your own property are your responsibility and you’ll usually need to get the freeholder’s permission to make any significant changes.
There are other potential charges to look out for, such as ground rent, administration charges, and buildings insurance which is usually arranged by the freeholder.
What are your rights as a leaseholder?As a leaseholder you have rights preventing the freeholder from taking advantage of you financially. For example, you can ask to see a breakdown of what the service charges are being spent on. How they have been calculated and any supporting paperwork, such as receipts for work done. The freeholder must also consult you about any building work costing more than £250 or before doing any work lasting more than a year or building work will cost you over £100 a year.
I appreciate this is a lot of information to take in, I have left my contact details at the end of this video.
Remember your home may be repossessed if you do not keep up with the repayments on your mortgage.