This guide covers everything you need to know about buying leasehold properties. Below, we’ll cover:
- An explanation of what leasehold means
- How freeholds compare to leaseholds
- Things to consider before buying a leasehold flat or house (lease length and costs)
- Are leasehold properties good investments, and should you buy one?
What is a Leasehold Property?
When you purchase a leasehold property, you are purchasing the property itself (house or flat), with the rights to “rent” the land for the specified lease period.
For many people, this is a scary thought, thinking the freeholder (who owns the land your property sits on), could simply kick you out at the end of the lease. Essentially, it’s not that simple.
The freeholder has to give you the opportunity to renew your lease (and at a predetermined “reasonable” cost), so it’s not much different to a freehold property (although the differences are explained below).
Freehold vs Leasehold
Buying a leasehold property means you only own the property (not the land) for the number of years specified on the lease (unless the lease is extended). It’s likely you’ll be subject to small fees such as ground rent, service charges and lease renewal costs.
Buying a freehold property means you own both the property, and the land it sits on. There are no other costs (such as the ground rent, service charge and lease renewals mentioned above); you own the property outright.
Typically, leasehold properties are flats and maisonettes. And, that’s simply because multiple properties occupy the same area of land; it’s a communal space that multiple properties use. It’s quite hard to split between owners.
A leasehold house however, is slightly different. If you find a leasehold house for sale, don’t be alarmed. However, the cost of a leasehold house should be considerably cheaper than the freehold equivalent. In many instances, it could represent a 10-20% discount.
Many people buy leasehold houses, then purchase the freehold for a nominal fee (in the grand scheme of things). By doing so, they have instantly added value to their house and therefore, on some occasions (assuming the lease is long), buying a leasehold house could represent an opportunity, rather than a risk.
Guide: Buying a Leasehold Flat or House
If you’re buying a leasehold flat or house, there’s a few REALLY important things you need to research relating to that particular property. And, we’ve explained them all below.
How Long Should a Lease Be
The length remaining on the lease of your property is the single most important thing to consider. When originally sold, flats and maisonettes commonly come with a 125 year lease. Leasehold houses, in general, tend to come with a 999 year lease.
If the previous owner hasn’t renewed the lease, it could be getting low. And by “low”, we don’t mean 2-3 years left on the lease.
If you buy a leasehold flat or house with less than 80 years on the lease, you’re not looking at a basic lease extension. Instead, “Marriage Rights” come into play, which means the freeholder can charge not just the average cost for renewal, but also depending on exactly how many years the lease has left, they’re entitled to a percentage of the increase in value, since the lease was last renewed/issued.
This can get very expensive, very quickly. And for this reason, mortgage companies will not offer you a mortgage on leasehold flats or houses with less than 80 years remaining on the lease.
Costs are Associated With Leasehold Properties
When buying a leasehold property, after determining the length of the lease, you’ll want to review the management pack. This will detail costs and liabilities of the current owner, and the new owner (you).
Ground rent is usually a nominal fee, and paid annually. If you’re lucky, your leasehold management pack will state a peppercorn ground rent, which could be as low as £5 per annum. But be careful, some new build properties can be a lot higher.
Alongside this, look at the terms of increasing the ground rent. When can the freeholder increase the ground rent, and by how much?
Leasehold service charges are usually the biggest expense, and the reason people don’t like owning leasehold flats and houses. So, refer to the management pack for details on the cost of the service charge.
As many freeholders will cover the cost of repairs (such as gutters, communal gardens and structural damage), the service charge can fluctuate.
Whilst some leasehold properties can have service charges as low as £150-200 per annum, newer flats and houses could be £200 per month or higher. That’s like paying off an extra £50,000 on a mortgage!
Like the ground rent, it’s worth referring to the management pack to check not just the current service charge, but also the terms and conditions whereby the freeholder can increase this charge. When can they increase it, and by how much?
Reserve and Sinking Funds
Next we have the reserve or “sinking” fund. Some (but not all) blocks of leasehold flats will require every flat owner to contribute to a fund or “pot” that’s used for repairs and upgrades. Check your management pack to see if this is the case, as opposed to just paying a service charge once per annum.
Lease Renewal Costs
If a leasehold house or flat looks cheap, it’s probably because the lease is low. You’ll want to renew it before it gets down to 80 years, so the bigger the lease you have the better.
I know what you’re thinking. How much does it cost to renew a lease? If you’re lucky, as little as £1,000-2,000. It’s based on your property’s value, compared with the remaining years left on the lease.
There’s a useful calculator for lease renewal costs here.
Buying the Freehold
Buying a freehold on a leasehold property can be a wise investment. As lease renewals are fairly cheap, some freeholders would be prepared to sell the freehold for a nominal fee. For instance, if you renew for 125 years at a cost of £3,000, the freeholder might be prepared to sell for £5,000-6,000, simply because they know they’ll never get any money from you again.
It’s an option for flat and maisonette owners, but not essential. However, for leasehold houses, this could represent a great opportunity. Leasehold houses worry people (for no reason), which means they are below market value. Purchasing a freehold for a house could add on 10-20% to your house’s value; it’s definitely worth investigating!
Should I Buy a Leasehold Flat or House?
Buying a leasehold flat or house isn’t a “bad” investment. But, you need to ensure you understand everything explained in the management pack. High service charges and not many years remaining on the lease? This decreases the value of a property considerably.
And remember, you can make enquiries into the cost of a lease extension, ground rent and service charge rises and even buying the freehold, BEFORE you purchase the property; helping you make a more informed decision.
So, we’ve covered the meaning of leasehold in properties, how leasehold compares to freehold, costs associated with buying a leasehold property and if they’re a solid investment. Hopefully that gives you enough information to make an informed purchase decision.
If you’ve enjoyed our leasehold guide, bookmark our page and come back soon; we’re consistently publishing articles and guides helping new and existing property buyers.