Subscribe to our monthly newsletter

Get the knowledge and inspiration you need to help you build
a profitable portfolio - straight to your inbox!

Residential buy-to-Let

The difference between leasehold and freehold

Author: Luke

A

A

A

A

Buying a property can be a daunting process. From legal fees to mortgage rates, a lot can change once you own a property. However, the term ‘homeownership’ can mean different things depending on your circumstances: if you buy a house it’s likely you’re a freehold owner; but, should you opt for a flat, you’re probably a leasehold owner; meaning that your rights and responsibilities are different.

The details can be difficult for the first time buyer to understand, due to a lack of experience, so here’s a guide by Battersea estate agents, Eden Harper to understanding what both terms mean…

Leasehold properties

Most flats are leasehold properties, but you may occasionally have a share of the freehold. It’s always important to find out before you buy, but the likelihood is that your flat is leasehold – especially if it’s an ex-local authority building, where the freeholder will be the council. This means that on top of mortgage repayments, you’ll be expected to cover what are known as building works, by paying a monthly service charge. These can be maintenance costs for the lift, stairs, roof – anything that is outside your property, yet deemed to be community areas, and can cost as much as £1,000 per year.

Many people will not only be upset by these costs but feel they are being over charged by the freeholder as sometimes it can be difficult to work out where your money has been spent.

Unfortunately, you as only a leaseholder, you are obliged to pay these costs and you don’t have the kind of power presumed once you own a property. For example, you can’t make substantial changes to the property without gaining permission from the freeholder which sometimes means you can only redecorate instead of being able to rip out a wall to make the bathroom bigger.

However, if you’re not happy with service charges and feel they’re too high, you can challenge these through Leasehold Valuation Tribunals (LVT).

Ultimately, leaseholding a property means just that: you only have the right to stay in the property for a number of years. Some leases are for fairly long periods like 100 years, but other can be as short as 40 years, meaning that you may find it harder to sell the property; as some mortgage companies are unwilling to give new leaseholders money to buy.

Hints:

Keep an eye out for Section 20 notices. This is a ‘notice to carry out works’ upon all lessees and could be tough on your wallet.

Once a lease gets below 80 years, there’s an additional fee to pay to the landlord – this is known as ‘marriage value’. This is because an extended lease adds extra value to the property, so property plus longer lease (marriage) exceeds the combined value of the separate entities. Always look to extend your lease before it hits the 80 year mark.

Freehold properties

Freehold works differently as you own the property outright, meaning that assuming you have planning permission, you can do what you like to the building. For example, you can extend up or outwards or maybe even dig down if you have the money. It can also be cheaper to be a freeholder since you don’t have maintenance costs, any changes you make are up to you to do when and if you feel like it. This option is generally preferred as it gives you outright control of the property and you are more likely to sell it as the property will appeal to many more buyers.

As mentioned previously, most freeholds are houses, yet some flats offer a ‘share of the freehold’ which means that you pool maintenance costs with other owners in your building, rather than having an outside body decide. However, remember that there may be disputes amongst you in terms of costs and what needs doing.

Whichever you choose, make sure you have the right information and know exactly what you are signing as misunderstanding can cause many more headaches than you would like. Both options can be difficult and come with risks and responsibilities, just make sure your choice the right option for you.

You may also like: