Freehold or leasehold – what’s the difference?

When entering the property market, it’s likely that freehold and leasehold are terms that you will come across.

While they may seem like legal jargon, they are important phrases indicating two different forms of homeownership. But what do they both mean?

Below, using our knowledge and experience as online estate agents, we take a closer look…

What is a freehold?

With a freehold property, the buyer permanently owns the building and the land that it stands on outright.

This option is preferable for most buyers due to the home belonging solely to them with no service charges, managing agent fees or admin costs.

The main argument for freehold over leasehold is that you don’t have to pay ground rent or other associated landlord costs. You also won’t have to worry about the lease running out or any disputes with the freeholder. Securing a mortgage on a freehold is also less of a hassle.

If you wish to change or modify your property, there are only legal and planning restrictions. This means owners of freehold properties have more flexibility when undertaking building projects.

As a freeholder, though, you do have a responsibility to maintain the fabric of the building, such as the exterior walls and roof of your home, as well as any garden space you might own.

While most houses are freehold, some might be leasehold – usually through shared-ownership schemes.

For these reasons alone, freeholds tend to be more desirable, commanding a higher value than leaseholds. As such, sellers will usually find it easier to sell – and get better value for – a freehold property.

The freehold of a home can be bought by various leaseholders working together – known as ‘collective enfranchisement’ – to own the property outright. However, there are a number of complications that can make this very hard to accomplish.

What is a leasehold?

With a leasehold, you own the property for the duration of the lease agreement with the freeholder, but not the land the home stands on. Nearly all flats and maisonettes – particularly those in main city centers – are leasehold properties.

Once the lease expires, ownership returns to the freeholder, unless you are able to extend the lease.

When purchasing a leasehold property, the buyer inherits the lease from the previous owner. As such, buyers will need to consider how many years are left on the lease before committing to the purchase.

Getting a mortgage could also be a problem if the lease is for less than 70 years. Lenders like the lease to run for at least 25 years beyond the end of your mortgage. If the lease is for less than 80 years, it can be tricky to sell a leasehold property.

Extending the lease isn’t usually an issue, and you can ask your landlord to do it any time. What’s more, 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 a qualifying tenant. If your original lease was for more than 21 years, you are highly likely to qualify.

As the owner of a leasehold, you are responsible for repair and maintenance work for the property you own, but maintaining and running the building that your property resides in is the duty of your landlord.

Nonetheless, you are required to pay ground rent, admin costs, buildings insurance (arranged by the landlord) and service charge.

In simple terms, a leasehold property means you own the home and all the rights and responsibilities associated with that, but you don’t own the building the home is housed in or the land surrounding it.

A third option…

If you’re stuck making a decision, there is a third choice to consider. Commonhold is an alternative to the leasehold system, created by the Leasehold Reform Act of 2002.

This is where a multi-occupancy building is divided into a number of freehold units, so each individual flat owns its own freehold, intended for occupiers of blocks or flats, and other buildings with shared services and common parts.

The common parts (staircases and hallways etc) are owned and managed by a commonhold association – a company that is owned by the freeholders of the flats.

This essentially means there is no superior freeholder, but rather the owners of the flats manage the land, building and common areas, and are responsible for maintenance, repair and servicing of these areas.

Here at 99home, we can help you through every step of the buying, selling and letting process. To find out more about our services, please get in touch with us on 0203 5000 999.

Also, if you’re eager to find out how much your property could be worth on the current market, we provide a free and instant online valuation.