Should I Buy Freehold or Leasehold?

What is a Leasehold property?
Leasehold is a method of owning a property, which is typically an apartment, for a fixed term, but you won’t own the land on which it stands.

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What is a Freehold property?

Freehold is the outright ownership of the property and the land on which it stands.

What makes a good Leasehold?

You should always ask about the terms of the Lease when buying a Leasehold property to ensure that there won’t be issues with raising a mortgage if you require one, or, re-selling the property when you choose to exit your property investment.  

Some of the key questions to ask include:

• How much is the ground rent?

How much is the annual ground rent payment?

• Is the ground rent reasonable in relation to the purchase price?

Due to the recent Leasehold reforms, the number of mortgage lenders willing to lend against a Leasehold property is restricted where the ground rent is in excess of 0.1% of the purchase price, which they deem to be a reasonable ground rent.

For example, if you purchased a Leasehold apartment for £150,000 the ideal ground rent would be £150 per year.

• What is the length of the Lease?

Leases typically range anywhere from 125 years to 999-years, the latter commonly referred to as a virtual Freehold, which is preferable.

• What is the remaining term of the Lease?

If the Lease is too short, it may be an issue for mortgage finance and also become a problem when you come to re-sell. This is something to specifically ask when looking to buy an older Leasehold property.

Leases can be renewed, however, there is typically a cost involved with a payment to the Freeholder and legal costs.

• What is the rent review terms?

How often is the ground rent reviewed? Typically, this is every 5 or 10 years, anything less should be treated with caution.

The mechanism for the review also should be clarified as historically, some ground rents doubled every 10 years. Most ground rent reviews are now in-line with the Retail Price Index (RPI), which is a fairer increase.

• Are there any restrictive covenants?

Restrictive covenants place restrictions on what the property can be used for within the Title.  

You need to ensure that any restrictive covenants do no conflict with your investment strategy, for example, short-term lets.

• What type of Leasehold property is it?

The UK Government banned the sale of Leasehold houses, however, this does not apply retrospectively to houses that have already been purchased on a Leasehold tenure.

Mortgage lenders are typically unwilling to lend against a Leasehold house; therefore, it restricts the re-sale value and will likely take a long time to sell.

If you are buying an existing house, you should ensure that you are buying the Freehold Title and not the Leasehold.

You should always consult with your solicitor on the terms of a Leasehold for their expert advice before committing to purchase the property.

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Is Freehold better?

Freehold property will mean more responsibility for the maintenance and upkeep of the building; therefore, if you are cash rich but time poor, it may not be the best option for you.

Investing in a Leasehold apartment will require payment of ground rent, service charge and also contributing towards any unforeseen and non-insured maintenance issues if there aren’t sufficient funds available in the reserves. The property management company who look after the building will organise.

If there is an unforeseen maintenance issue that the Leaseholders have to pay for, such as a repair to the roof, the Leaseholders share this cost, whereas if it was a Freehold property, the Freeholder would have to pay the whole amount.

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