Should You Buy A House With A Leasehold?

Buying a house comes with its own array of challenges, the biggest of which can be getting to grips with all the new jargon that can be thrown your way by estate agents, sellers, and the internet.

If you are looking into buying a home and the seller tells you that it is a ‘leasehold’ property, it can send alarm bells ringing. What is a leasehold property? What does it mean? Is it more expensive than another property that isn’t leasehold? All these questions and more can be running through your mind.

If you are looking into buying a leasehold property, it is important to fully understand exactly what you are signing up for and what owning a leasehold property involves. In this article, we will be exploring the topic in more detail, looking at the difference between leasehold and freehold properties as well as how the lease works and the advantages and disadvantages of living in a leasehold home.

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Freehold Vs Leasehold

In order to fully understand what a leasehold property is, we must first look at the different types of property available. In England and Wales, there are two main types of property available to purchase. The property will usually be classed as either a freehold property or as a leasehold property.

If the property is a freehold property, then the buyer will own both the property and the land that it is situated on for an unlimited period of time. Thanks to the Civil Aviation Act of 1982, the buyer will also own the ‘airspace’ up to 500ft above their property as well.

On the other hand, if a property is classed as a leasehold, then the buyer will own the property itself, but they will not own the land that the property is situated on, this is instead owned by the freeholder. Instead of owning the property for an unlimited period of time, with a leasehold house you only own the property for a set period of time.

span style=”font-weight: 400;”> The length of this time period is dependent completely on the length of the lease. Leases can vary in length from years to decades and in some cases centuries. However, if you do not extend the lease, ownership of the property is technically deferred to the freeholder.

It is worth bearing in mind that in the eyes of the law, you are a tenant of the freeholder as long as you are living in the leasehold property. Whilst you can both buy and sell the property, with a leasehold house you do not technically own it, you only own the lease.

It can be possible to buy the freehold on a leasehold property. If you are on the fence about purchasing a leasehold property, you can have a look into who owns the freehold and whether or not they would be willing to sell it on.

Lease Length

As we have established, leases have lifespans and the right number of years left on a lease can add thousands if not hundreds of thousands of pounds to your leasehold property’s market value.

When purchasing a leasehold property, you want to look out for a long lease. As far as leasehold properties are concerned, 80 is the danger zone. Any property with a lease with 80 years on it or less is a huge area for concern.

Marriage value is the amount of extra value a lease extension would add to your property and once a lease has only 80 years remaining on it, you will have to pay an extra 50% of the property’s marriage value in addition to your usual price of the extension.

If you already own the property and allow the number of years left on the lease to fall below 80, it can make the property difficult to sell or remortgage. For buyers, this means that lenders may not be willing to give you a mortgage on it. It is for this reason that it is necessary to extend your lease.

However, lease extension can be an expensive and complicated task as the price of extension rises with the fewer years a lease has left on it. The seller or housing developer should provide you with information about lease length, but if you are unsure, speak to your conveyancing solicitor.

Leases To Look Out For

If you think about leases like a traffic light system, a lease with less than 80 years left is definitely a red light. Harder to mortgage and difficult to sell, a lease with 70 years left will result in an increase in mortgage rates and if the years fall to under 60 the property will become virtually unmortgageable.

An amber area for leases would be at around the 83-year mark. Once a lease reaches 83 years it is time to start looking into extending the lease whether you are buying or selling.

A green lease is any lease that has 90 years left on it or more. Some leases can have up to 999 years on them but a good rule of thumb is the more years left on the lease, the more profitable your house will be.

Common Problems Found In Leasehold Properties

Much like freehold property, leasehold property is not without its problems. In recent years there have been multiple issues found within the leasehold sector.

After thousands of leasehold homeowners complained about being mis-sold or misled over the terms of their lease an investigation by the Competitions and Market Authority (CMA) was launched which found “worrying evidence” of homeowners being taken advantage of.

It found that leaseholders faced punitive ground rents and service charges as well as others who were not made aware upfront that the property was a leasehold or how much it costs to extend a lease or to purchase a freehold.

Ground Rent

The biggest problem that was unearthed in the CMA investigation was ground rent. Ground rent is a nominal sum paid to the freeholder, however, in more recent years leaseholders have been paying ground rent that can be in excess of £250.

For some leaseholders, ground rent would double every few years, meaning that they were paying £100s or £1000s in ground rent.

This meant that remortgaging their houses or selling the property was almost impossible as the ground rent was so high. As the terms of ground rent are written into the lease, it can be costly to have a legal team remove or amend it.

An overhaul system is currently being attempted by the British Government to make it easier and cheaper for leaseholders to scrap ground rent on existing leases and they aim to abolish ground rent on new leases come July.

Service Charges

For those leaseholders who live in new-build estates, another common issue faced is expensive service charges.

Service charges are typically paid monthly or annually to the freeholder or service management company who in return uses this money to look after common areas of your building or estate.

For most leaseholders, these charges can be a fairly modest sum however there have been cases of leaseholders being charged hundreds and thousands of pounds each year. Similarly to ground rent, service charges are written into the lease, and if there is no limit to what you can be charged then you may end up paying more than is fair.

Lack Of Information

The CMA investigation also uncovered that some leaseholders were not made aware of the costs of lease extensions, about the length of the least, or even that the property they were purchasing was a leasehold.

What Are The Pros And Cons Of A Leasehold Property?

Whilst there are undoubtedly things to consider when dealing with a potential leasehold property that doesn’t mean you shouldn’t buy one. Like with any property purchase there are pros and cons to it.

Pros:

  • Building Insurance – As you only own the property and not the land it’s situated on, building insurance will usually be sorted by the freeholder. You will still have to contribute to the cost though, usually in the form of a service charge.
  • Problems Solved – If you are having any issues with your property, such as noisy neighbours, terms in the lease can mean that they can be dealt with. If you are a freeholder and have such issues you have no choice other than to contact the police.
  • Upkeep And Repairs Covered – Depending on the terms of your lease, upkeep and repairs in communal areas should be sorted by the freeholder.

On the other side of the coin, however, are issues that leaseholders will have to deal with that do not occur for freeholders.

Cons:

  • Ground Rent – With a leasehold property there may be the issue of paying ground rent or a service charge, both of which can be costly.
  • Restrictions On Building – If you wanted to carry out any major building work or refurbishment to your property you may require consent from the freeholder and there is no guarantee they would say yes.
  • Spending – If your freeholder wants to carry out work in any common areas or to your property, unless it isn’t stipulated in your lease, you will have to pay.

Should You Avoid Buying A Leasehold House?

Whether or not you want to buy a leasehold property is entirely down to the individual. As long as you are aware of exactly what a leasehold property involves, the length of the lease, and any service fees or ground rent you may need to pay then there is nothing to stop you from purchasing a leasehold home.

This covers everything you need to know about leasehold properties. If you have any questions or queries, or any experience in the subject, please feel free to get in touch!

Alexandra is a junior content producer who enjoys writing articles and finding out more about the property market.

About Alexandra Ventress 10 Articles
Alexandra is a junior content producer who enjoys writing articles and finding out more about the property market.

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