In the world of property, you will the hear words freehold and leasehold used plenty. But what exactly do they mean and what's the difference between the two?
To clear up any confusion, we take a closer look at what constitutes a freehold property and what constitutes a leasehold one. Prospective home buyers may be especially interested in the distinction, as it may well have a bearing on their decision about which type of home to buy.
This type of property is one that the home buyer owns outright - not just the building itself, but the land it stands on and some of what surrounds it. In simple terms, it's all yours, with no admin fees, management costs or service charges added.
As a result, a freehold property is preferable for the majority of buyers and homeowners, eager for the added security, greater sense of ownership and absence of any additional costs that this type of home provides. With a freehold property, there are no ground rents, service charges or landlord costs to pay. What's more, there are no concerns about leases expiring or disputes with the freeholder.
Buyers also generally prefer freehold properties because it's easier to get a mortgage on this type of home, chiefly due to the fact they provide more stability and security to lenders. The majority of Britain's houses - whether they be detached, semi-detached, end of terrace or terraced - come under the freehold banner, although some (particularly those used for shared ownership schemes) are leasehold.
If you're looking to buy a larger house or a family abode, it's highly likely to be a freehold, while flats and apartments will generally be leasehold. The amount of freehold properties on offer tends to dramatically outnumber leasehold properties, so in terms of choice and range buyers will have more to pick from with regards to freehold properties.
With a freehold, you will also find it much easier to make adjustments, upgrades and changes to your home. As you own the home and land outright, there will be far fewer obstacles in the way when it comes to renovations or major building projects. You will still need to get legal and planning permission for any large-scale works or modifications to your home, but you will benefit from far more flexibility than a leaseholder would.
Another advantage of a freehold is it tends to be more desirable - and attracts greater demand from buyers - than a leasehold home. So, as a seller with a freehold home, you are likely to find it easier to sell your property, with buyers keen to own their home outright and have the extra security and stability that owning a freehold brings.
Having said that, there are certain downsides to a freehold property. You will be responsible for all maintenance, both inside and outside your house, which could prove costly over time. Maintaining garden space, exterior walls and the roof of your home - to give just three examples - could set you back in the mid to long-term, and these extra costs will need to be factored into your monthly budget when it comes to household costs. While mortgage repayments are highly likely to be your biggest outgoing each month, you'll need to make sure you have the funds to cover maintenance costs as and when they arise.
Unlike a freehold, a leasehold property means you don't own the home outright. Instead, you own the home for the duration of your lease agreement with the freeholder, but the land the property sits on - and the land that surrounds it - isn't yours. Once the lease ends, ownership of the property returns to the freeholder unless an agreement is reached to extend the lease.
To put this in simple terms - the home is fully yours for the lease period, but anything beside, up above, down below or surrounding it isn't. Most flats, apartments and maisonettes are leasehold properties, particularly those found in blocks in major towns and cities. The blocks of flats or apartments are owned by someone else, but each individual home is sold off to buyers. Those homeowners then pay a service charge to cover the costs of running and maintaining the building and the areas outside their own flat.
A leaseholder's home is their own jurisdiction - and it's up to them to maintain, revamp and look after it - but responsibility for wider maintenance, for example of communal gardens or outside walls, is handed over to someone else.
When buying a leasehold property, the purchaser inherits the lease from the previous homeowner. As such, buyers of leasehold homes need to be aware, before committing to purchase, of how long is left on the lease. After all, there's little point in buying a home if the lease expires only a few years later and you have to spend lots of time and effort negotiating an extension with the freeholder.
Unfortunately, a mortgage on a leasehold property is also generally harder to secure, as lenders prefer homes which offer more long-term security and stability. Getting a mortgage on a home with a lease of less than 70 years could prove problematic, with lenders preferring the lease to run for at least 25 years beyond the end of your mortgage. Equally, selling a leasehold home could prove tricky if the lease is for less than 80 years.
Prolonging a lease, however, is very rarely a major issue, with most landlords/freeholders likely to be highly accommodating. After all, it's in their interests for the homes to be occupied. You can request an extension at any time and, once you've owned your home for two years, you have the right to extend your lease by 90 years as long as you are what is known as a qualifying tenant (if your original lease was for over 21 years, you are highly likely to qualify).
The value of a leasehold home, too, could decline over time because it's a leasehold rather than a freehold. If the demand isn't as high, negotiating your asking price or above could be tricky for sellers. That said, flats and apartments are highly popular - and growing in popularity across the country - so demand for these types of homes is likely to be strong and resilient, especially in major towns and cities.
With a leasehold home, it's important to remember that a service charge will be included, which contributes towards the maintenance and repairs of the building your flat, apartment or maisonette resides in. The landlord/freeholder of the building is in charge of organising and overseeing maintenance and repairs, often choosing to employ a property manager or management firm to carry out the work on their behalf. Things like electricity of communal areas, upkeep of communal garden space and redecoration projects will also be covered by this charge.
Other costs that can be associated with leasehold properties include ground rent and admin costs, as well as buildings insurance (although this is arranged by the landlord/freeholder). You are able to challenge any charges or changes the freeholder makes, with measures in place to ensure a freeholder has to consult you before any large-scale or costly building works are carried out.
When it comes to your own property, you will be slightly restricted in what you can do when it comes to major building works or major modifications. You will need to get permission from the freeholder for any significant building projects or changes and could find that a number of potential barriers are placed in your way. Blasé attitudes to renovating won't be possible, in other words.
As we can see, there are a number of dividing lines between freehold and leasehold properties. If you're unsure about what type of property you are buying - or how it might impact on your chances of selling in years to come - get in touch with a property expert to put your mind at rest.
If you would like further guidance on buying or selling a property call 0208 529 7685.