Freehold vs. Leasehold: It’s Important to Know the Difference

You may think that when choosing to move to a new home there are just two things to worry about: will you buy or will you rent? However, this isn’t the case. When it comes to buying, there are two types of contract to be aware of: freehold and leasehold. Although this may be common knowledge to some of you, many people still aren’t aware of the real implications of each type of property ownership.

What is freehold?

Essentially, a freehold house is what you are likely to imagine when you buy your first home. It is entirely your property; you own the land and you are responsible for all maintenance. Aside from planning permission from the council for certain renovations and extensions, you are free to do as you wish with your freehold home. And aside from any mortgage you might have, you won’t pay any ground rent or services charges to an external party.

Once you’ve paid for the house, it’s yours for as long as you wish. Obviously, this is the ideal scenario for those looking to invest in property. And the majority of homes are freehold. However, this isn’t always the case.

Buying a flat

Bear in mind, buying a flat as freehold is virtually impossible. This is due to the shared features of a building of flats – roof, communal garden and so on. You are much more likely to be buying a flat as leasehold – or share of freehold – and you should be aware of the implications.

What is leasehold?

It is important to remember that leasehold is still different to renting in that you actually own the property. However, it’s easy to get confused. Leasehold isn’t the same as freehold as you only own the property for the length of an agreed lease period. The property is still owned by a freeholder, who has leased the property’s ownership out to you. Although many leases last for around 70 years or more, once the lease on your home runs out, the property belongs to the freeholder and not you.

It is not uncommon for popular bulk development builders to sell their houses as leasehold, with the option to buy the freehold. This option will often only be available for a limited amount of time to the owner at a “good price”. However, this “good price” is usually in the thousands and is essentially a hidden cost that can catch out well-intentioned buyers.

The problems with leasehold

Unfortunately, many people are not aware of the implications of leasehold and so are happy to miss out on buying freehold. They are then shocked later on to find that they are hit with ground rent. This is paid annually; the lease normally determines how much is paid and how often. It’s not just the ground rent that is a sneaky hidden cost – freeholders can charge their leaseholders for a variety of reasons from answering letters to allowing pets.

Interesting fact: many years ago, leaseholders were only charged a very small ground rent fee – as little as £1 – and a lot of freeholders wouldn’t even bother collecting it. However, at the start of this century, developers cottoned on to the potential profitability of a leasehold. They started inserting clauses into contracts whereby ground rent was set at a much higher rate, doubling every ten years. Although it may seem like you’ve bought a “virtual freehold” with a 999-year lease, you could soon find ground rent spiralling out of control.

Now, the real problem with leasehold lies here. It is usually required that there be a minimum of 50 years lease remaining at the end of a homeowner’s mortgage term. The leaseholder is then required to renew their lease if the property is unmortgaged or they wish to sell it on. If the lease remains under 70 years, the leaseholder will find great trouble in selling it.

A profitable business

When leasehold properties are first completed on a site, builders can offer the freehold to their leaseholder for a price. Of course, the leaseholders don’t often take up this. The trick is, builders include the freehold ‘offer’ within the contract with a time limit attached. So buyers often don’t realise the importance or even understand the implications. Then, the developer will sell on any freeholds on their complete development to companies for a large sum of money. In the future, when homeowners wish to buy their freehold, these investment companies can offer them out at an even larger amount than they first bought them for. Hence, why this practice is such a profitable (and scandalous) business!

It’s important to be aware of the differences

As we can clearly see, freehold is a much preferable option. You will save yourself any hidden costs and legal implications if you stick to buying the freehold. Generally, there aren’t any advantages of buying leasehold over freehold. It may seem like a convenient option if your ‘dream home’ is a leasehold. However, we recommend holding off and shopping around for a freehold home that will ensure your peace of mind in the future. Here at CB Homes, we sell all of our homes as freehold.

Just last year, it was announced that the government were looking to ban new-build houses being sold as leasehold. However, we still haven’t seen any concrete changes to the law as of yet. This is good news for future buyers who may avoid falling into the trap of leasehold. But what about those who already own leasehold houses? According to The Guardian, nothing can be done until the government introduce laws which force developers “to pay compensation”. Until then, leasehold homeowners continue to be victims in the never-ending cycle of hidden charges and renewal costs.