If you’re a first time buyer you might be in the process of working out your affordability, what your options are and whether to go for a freehold vs leasehold property. You might even be wondering what exactly these property terms mean.
Buying your first home is one not to be rushed, and it’s important to research both freehold and leasehold properties to see what is best suited to your circumstances, as well as being fully aware of what you are legally entering into. As a first time flat owner (leasehold property) I take a look at freehold vs leasehold properties, what are the main differences between the two types of properties and which might suit you best.
Freehold vs Leasehold
Firstly, let’s take a look at exactly what each type means.
What Is A Freehold Property?
Freehold is a type of ownership of a property, freehold means that you own the entire property outright, including any surrounding areas as depicted on the deeds of the house. If you buy a freehold property this means you are responsible for maintaining the property. The majority of houses are freehold properties, there are some exemptions to this rule such as shared ownership schemes, and new build housing estates where some are classed as leasehold properties.
What Is A Leasehold Property?
A leasehold property is the type that is leased from a freeholder. Flats are generally always a leasehold property, this means that you own your flat, but not the property surrounding it. The freeholder (or landlord) holds a lease for the property, this lays out all the terms in your lease including service charges, ground rent, alterations to your flat etc. Whilst you own the flat, depending on the terms of your lease you usually need permission from the freeholder to make alterations inside your flat such as changing the flooring or windows. Owning a leasehold property means that you pay an annual service charge, this goes towards costs of maintaining the property which is conducted by the freeholder, or managing agent.
Whilst flats are the majority of leasehold properties in the UK, there are some occasions of new build houses that have a lease and this can include shared ownership schemes.
What’s The Difference Between Freehold vs Leasehold?
The biggest different between freehold and leasehold is that leasehold properties hold a lease which is regulated by the freeholder (or landlord). Whilst you own your flat, you don’t own the property/area surrounding it and the freeholder has some level of control over what you do to the interior of your flat too.
This is all laid out in the terms of the lease and will vary from leasehold properties. But it could include not being able to alter flooring, asking for consent for a pet which can be withdrawn at any time, and not changing any doors or windows.
As well as the terms that are laid out in the lease, there is also the concern of the length of the lease. The longer the lease the better for you, and for prospective buyers as a short lease can cause issues with mortgage lenders lending on the property. Anything above 80 years on a lease is considered good, but the longer the better. Most leases used to be about 999 years on a new property, but generally on new developments they are around 150 years now. Again, this does vary and is something to consider when purchasing a leasehold property. This does not apply to freehold properties, unless you are entering into a shared ownership scheme where this can be present.
As an owner of a freehold property you own the entire property and surrounding area which means if something goes wrong or needs fixing, you as the owner are responsible for maintaining, fixing and paying for it. This can be considered a downside to owning a freehold property as it’s difficult to prepare for issues that may arise with a property. However, it’s a good idea to keep a sort of ‘sinking fund’ so you can call on it when you do need the money.
Whereas with a leasehold property, you pay an annual service charge which goes toward the maintenance of the property. The service charge usually includes a contribution to a sinking fund too, this sinking fund is paid into each year and builds up until there is something the funds are needed for. This is in place for when an issue arises at the property which isn’t accounted for such as blocked drains, a leaking roof or broken stairs.
Flats (leasehold properties) remain a very popular choice for first time buyers and single buyers as flats are generally much cheaper than houses. However, there are also many flats that are more expensive than two bed houses, so it’s all about perspective. Generally speaking though houses do carry a much higher sale price than flats, so it’s worth considering this and your affordability when choosing between a freehold or leasehold property.
Additional Charges For Leasehold Properties
When it comes to a freehold property, it is yours wholly and completely so any costs you incur are a result of your property and maintaining it. This includes buildings insurance and any maintenance costs. On the other hand, a leasehold property brings a lot more additional annual costs. Firstly, you have the annual ground rent charge, this is a fixed fee which is outlined in the lease of the property, this can vary from £50 a year to anything up to £250 (£1,000 in London). It’s important to read the terms of the lease that surround ground rent to see at which point this can increase, and by how much.
The service charges are another provision to account for each year. Terms of this are also laid out in the lease and the cost will vary greatly on whether leaseholders manage it or if there is a managing agent. The latter is most common and can vary from anywhere between £500 a year to £3,000. Service charges account for things such as cleaning costs, maintenance, lift servicing, managing agent fee and communal electric. This can sometimes include your contribution to the buildings insurance, but this can sometimes be charged as an additional expense. The cost of the building insurance is divided by the total number of flats in the property.
Other charges can include administration charges, such as being setup with the managing agent, and fees for selling a leasehold property including getting an LPE1 form completed by the managing agent and freeholder which can cost in excess of £200+.
Leasehold properties often carry a selection of perks that houses don’t. If the flat is in a big block it might benefit from free access to a gym, parking, communal areas and garden spaces. Remember to factor all of these extras in when purchasing a leasehold property as they do add up.
Freehold vs Leasehold – which is right for me?
You’re going to hate me saying this, but it really is down to personal preference and circumstances whether you choose a freehold or leasehold property. As you can see there are both advantages and disadvantages to the both of them. In summary;
- You have more control with a freehold property, less so with a leasehold property
- With a leasehold property you just have to maintain your flat, you don’t need to worry about anything that is outside of your door
- Additional costs do come with owning a leasehold property, but just make sure you’re prepared and read the lease fully before purchasing so you don’t get stung with any hidden costs
- If you’re buying a leasehold property, pay attention to the lease. The longer the lease = the better
- Flats (leasehold) properties are generally cheaper than houses
It all comes down to what you want, and your affordability. As a single, first time buyer 5 years ago I went for a freehold property as it was all I could afford, and even that was a stretch back then. I could have bought a house for a similar price but the entire inside would have needed to be gutted at a cost I couldn’t afford, joint with the fact it would have been in a less than desirable area.
Both leasehold and freehold properties are perfect for the right circumstances as a first time buyer, just ensure you fully do your homework on both before taking the plunge. Best of luck in your search! If you are purchasing or thinking of buying a flat, I have plenty of other blogs on this in my property section of blogs.