What is the difference between leasehold and freehold?

When you're thinking about buying a property, it's important to understand the type of ownership you’ll have. The two most common types are leasehold and freehold.

But what do these terms actually mean, and how do they affect you as a property owner?

This blog will help you understand the key differences between leasehold and freehold properties, so you can make an informed decision when buying your next home.

What is Leasehold?

A leasehold property means that you own the property itself, like a flat or a house, but not the land it sits on. Instead, you have a lease from the landowner (known as the "freeholder") that allows you to use the property for a certain number of years - often 99, 125, or even 999 years.

As a leaseholder, you have the right to live in and use the property as your home. However, you don’t have complete control over it. For example, you might need the freeholder’s permission to make significant changes, like building an extension.

You’ll also have responsibilities, like paying ground rent and service charges to the freeholder. These cover things like maintenance of shared areas or the building’s structure.

What is Freehold?

Owning a freehold property is different. When you buy a freehold, you own both the property and the land it’s on outright. This means you have full ownership and control, with no time limit on how long you can own it.

With a freehold, there’s no need to worry about paying ground rent or service charges to anyone else. You’re fully responsible for maintaining your property and the land it sits on, but you have the freedom to make changes or improvements without needing permission from a freeholder.

Key Differences Between Leasehold and Freehold

Understanding the differences between leasehold and freehold can help you decide which type of ownership is right for you:

Ownership:

With a leasehold, you own the property for the length of the lease but not the land. With a freehold, you own both the property and the land permanently.

Duration:

Leasehold ownership lasts for a set number of years. Once the lease expires, ownership returns to the freeholder unless you extend the lease. Freehold ownership has no time limit.

Costs:

Leaseholders pay ground rent and service charges to the freeholder, while freeholders do not have these costs.

Control:

Leaseholders have less control over their property since they must follow the terms of the lease. Freeholders have more freedom to make changes to their property as they see fit.

Pros and Cons of Leasehold Properties

When considering a leasehold property, it’s important to weigh the advantages and disadvantages:

Advantages

Lower Purchase Price:

Leasehold properties, particularly flats, are often cheaper to buy than freehold houses.

Urban Areas:

In cities, leasehold is more common, especially for flats, which can make it easier to find a property within your budget.

Maintenance and Repairs:

Some of the maintenance responsibilities, like looking after common areas or the building’s exterior, may be taken care of by the freeholder, so you don’t have to worry about them.

Disadvantages

Ongoing Costs:

As a leaseholder, you’ll need to pay ground rent, service charges, and potentially fees for lease extensions, which can add up over time.

Limited Control:

You’ll need the freeholder’s permission for certain changes to your property, such as major renovations or subletting.

Lease Expiry:

If your lease has less than 80 years remaining, it can be more difficult to sell the property, and extending the lease can be expensive.

Pros and Cons of Freehold Properties

Freehold ownership also comes with its own set of advantages and disadvantages:

Advantages

Complete Ownership:

As a freeholder, you own both the property and the land it stands on outright, giving you full control.

No Ground Rent or Service Charges:

Unlike leasehold properties, there are no additional payments to a freeholder, which can save you money in the long run.

Easier to Sell:

Freehold properties are generally easier to sell since there’s no lease to worry about, making them more attractive to buyers.

Disadvantages

Higher Purchase Price:

Freehold properties tend to be more expensive to buy upfront compared to leasehold properties.

Full Responsibility:

As the freeholder, you’re responsible for all maintenance and repairs, both inside the property and on the land it sits on.

Potential for Restrictive Covenants:

Even though you own the property, there might be restrictions (known as restrictive covenants) in the title deeds that limit what you can do with the land, such as building certain extensions or keeping specific animals.

Common Myths and Misconceptions

There are a few common myths about leasehold and freehold properties that can cause confusion. Let’s clear them up.

Myth: Leasehold is Always a Bad Deal

Reality: While leasehold properties have their challenges, they can be a good option depending on your circumstances.

For example, if you’re buying a flat in a city, leasehold might be your only option, and it can still offer a comfortable and convenient living arrangement.

Myth: Freehold is Always the Best Option

Reality: While owning a freehold property gives you more control, it also comes with more responsibilities. If you prefer less maintenance and don’t mind paying service charges, a leasehold property might suit you better.

Tips for Property Buyers

Whether you’re considering a leasehold or freehold property, here are some tips to help you make the right decision:

Leasehold

Check the Lease Length:

Before buying, find out how many years are left on the lease. A short lease can be costly to extend and may affect the property’s value.

Understand the Terms:

Make sure you understand the lease terms, including your rights and responsibilities, ground rent, and service charges.

Budget for Additional Costs:

Remember to factor in the cost of ground rent, service charges, and potential fees for extending the lease.

Freehold

Check for Restrictive Covenants:

Even though it’s a freehold, there might be restrictions on what you can do with the property, so review the title deeds carefully.

Consider Maintenance Costs:

As the freeholder, you’ll be responsible for all maintenance and repairs, so it’s important to budget for these expenses.

Do a Title Check:

Ensure the property’s title is clear of any issues that could affect your ownership or ability to sell in the future.

Conclusion

Understanding the difference between leasehold and freehold is crucial when buying a property. Leasehold properties can offer a more affordable entry into the property market, especially in urban areas, but they come with ongoing costs and less control.

Freehold properties, on the other hand, provide full ownership and greater autonomy but require a larger upfront investment and full responsibility for maintenance.

Ultimately, the best option depends on your individual needs and circumstances. By being informed about the pros and cons of each type of ownership, you can make a confident decision that suits your lifestyle and financial situation.