Freehold and Leasehold Ownership for Property Investment
Our recent article about investing in UK property from overseas touched upon freehold and leasehold properties. We created this guide to help property investors understand the differences between these important terms before making a purchase.
Difference between Freehold and Leasehold
To begin with, freehold and leasehold are two types of property ownership that concern the model of land ownership. In simple terms, in a freehold, the owner owns both the property and the land. On the other hand, in a leasehold, the owner owns the property, but ‘rents’ the ground it is built on from another party. For example, most apartments in a large building are leaseholds where the buyer purchases the apartment itself, but the land remains the property of the seller. Houses in the UK are traditionally freeholds, although there are exceptions.
Leasehold ownership risks for property investment
In some cases, leasehold ownership can be a suitable option for property investment. For example, some leasehold properties do not charge Service Charge or Ground Rent, or it is very low. Additionally, in some cases investors can purchase the lease from the freeholder for a low price, allowing the investment to produce a good ROI.
However, before making the decision to invest in a leasehold, it’s important to consider all the potential risks and assess how they affect the property you are considering. We’ve put together a list of the top 5 things to consider before investing in a leasehold:
Ground Rent and Leasehold Length
Owners of a leasehold property owe Ground Rent to the property’s freeholder. Usually, the Ground Rent price is determined before the purchase and set to remain at the same cost for the length of the lease. If the lease is long (usually 90, 120 or 999 years) it should provide a level of security to property owners. However, it is possible that over the course of the years the land is resold, and the lease terms are subject to change.
Service Charges are not in the hands of Leaseholders
In a leasehold, the Service Charges (upkeep, repairs, and ongoing maintenance) are determined by the landowner. This can result in expensive renovations that owners cannot afford or wouldn’t choose to pay for themselves. However, under a leasehold agreement, they are expected to contribute to the charges and have little opportunity to dispute them.
Mortgages can be hard to get for Leaseholds
With the lease period getting shorter, leaseholds become more difficult to sell. Mortgage providers see them as risky as the new lease is yet to be determined within the mortgage repayment period. With this in mind, leases can be extended, but it can be a lengthy and expensive process.
Conveyancing costs are higher
Although leaseholds are overall cheaper than freeholds, the legal costs of the purchase can be far higher. A conveyancer is a lawyer who specialises in property and goes through all the legal aspects of the purchase. The complications that leaseholds come with often result in high conveyancing charges.
Leaseholders may need permission to build or rent
Most leaseholders need to obtain official permission from the landowner when they want to do building work on their property. Landowners can also stop leaseholders from having pets on their properties or renting them out. Additionally, if these terms are broken, the leaseholder can be taken to court and lose their lease.
Benefits of Freehold vs. Leasehold Ownership
Overall, freeholds are the preferred option for property investment over leaseholds. The long-term benefits they offer are more likely to increase the value of the investment over time.
The freehold owner will be responsible for all maintenance and repairs which can be time-consuming. However, they can hire a company of their choice to manage the property and take care of its upkeep. Additionally, any structural changes to the property will only need planning permissions to move forward and can increase the value of the property over time.
Government Leasehold Reforms
Currently, due to UK laws and regulations, leaseholders may face expensive ground rents. Alongside paying off a mortgage, this can be challenging to leasehold property owners. It is in freeholders’ rights to increase ground rent prices with little to no justification about the benefits this will provide to leaseholders.
However, recent changes in laws concerning leaseholds are likely to reduce the stress and financial worries of leaseholders. In line with new regulations, any leaseholder will be able to extend the lease on their home to a standard of 990 years and will no longer pay ground rent. For some leaseholders, these reforms can bring a meaningful financial difference and allow them to own the land their homes are built on.
Additional regulations are set to be introduced to protect owners of retirement leasehold properties. Ground rents will be restricted to zero for homes built for the elderly to avoid uncertain and harmful practices.
Investing with Closefield Properties
We can assist with all parts of the process and offer detailed insights into the best areas of the UK for property investment. Get in touch with us today to book your first consultation with our experts!