Freehold vs Leasehold: Understanding the differences (and the dangers)
Buying a home can be a confusing process, with lots of legal stuff that's hard to get your head around. One of the most important things you must fully understand is the difference between leasehold and freehold ownership, especially if you're a first-time buyer.
So what's the difference?
Simply, it's the difference between owning your own home outright, and having a landlord. If you're buying it may sound weird that you'd still have a landlord, but it's actually a common scenario.
- Freehold's where you buy the building and the ground it sits on and you own it until you sell it to someone else. It's normal for a whole house to be sold freehold, although shared ownership properties can often be sold on a leasehold basis with an option to purchase the freehold later on.
- Leasehold means you've bought exclusive use of the property for a certain amount of time (usually 99-125 years), but you don't actually own the land it sits on. After the lease runs out, ownership returns to the owner of the freehold. Flats are usually sold leasehold because they form one part of a larger building.
What do you need to be careful of?
The main thing with a leasehold property is the length of the lease. As this gradually declines it needs to be extended for your property to keep its value. Mortgage companies often want a certain time left remaining at the end of the mortgage before they'll lend. This will usually be at least 80 years.
Also, check who's responsible for maintenance and repairs. As a leaseholder, you'll be responsible for any repairs inside your home, but the landlord should be responsible for any communal areas like hallways and stairs.
In recent years there's been lots of coverage in the media about buyers who've been caught out by leasehold purchase schemes, not realising the freehold of the property has been sold on to a separate company. Make sure to check this before you buy.
Are there any costs or fees?
The most common charge to look for in a leasehold property is ground rent. This is a charge you pay to the landlord, literally for renting the ground your home sits on. It can be either escalating or fixed, meaning it will increase or remain the same for the duration of the lease.
Service charges are for landlords to recover the cost of providing services to a building and should be explained in your lease agreement. They can vary from year to year, going up or down without any limit other than that they're reasonable.
If you're a freeholder, check you don't have any fees to pay for maintenance of any shared spaces connected to your property, such as gardens or driveways that aren't maintained by the local authority.
What insurance will you need?
A freehold property should have buildings cover in place. This is in case you experience any serious structural damage to your home or the land it's built on, such as subsidence or fire. Although it isn't a legal requirement, most mortgage providers will insist you have buildings insurance. Without it, should anything serious happen to your home, you probably wouldn't be able to afford to rebuild it but you'd still have to repay your mortgage.
Leasehold properties will usually have buildings insurance included in the service charge you pay. This is something you should make sure of when you buy the property as it's typically the responsibility of the landlord. Contents insurance is worth considering whether you're leasehold or freehold, as this covers any valuables inside your home that could be lost, damaged or stolen.
At Hastings Direct we pride ourselves on offering quality insurance at competitive prices. Our home buildings and contents policies are Defaqto 5 star rated and come with a range of great benefits as standard.
Get a quote today and see how much you could save.