What is a Freehold Property?
A freehold property is one that is sold with the land under it. This means that when you buy a freehold property, you own both the building and the land that it sits on, and are therefore responsible for maintaining both. This also means that you own the property for an unlimited amount of time, and so the agreement is much simpler.
What is a Leasehold Property?
A leasehold property is one that is sold with the right to occupy it for a long period of time, but without owning all of the property. This could mean that you don’t own communal parts of the building, for example a block of flats, or the land underneath the property, if it is a house.
Typically, a lease is issued for between 99 and 999 years, and comes with terms that will vary from property to property. This means that when you buy a lease from a previous owner, or from the freeholder, you can live in the property for a limited amount of time, although in most cases this will be for far longer than you are expected to live.
Leasehold properties often have more complicated agreements, and the terms and charges will differ for each property, so bear this in mind when looking for apartments to buy.
The Costs of Owning a Leasehold Property
When buying a leasehold property, there are some extra fees and charges that you will need to consider. These typically include a ground rent, service charge and a sinking fund or reserve fund.
Ground Rent
Ground rent is typically charged annually by the freeholder, and is usually no more than a few hundred pounds. When looking at apartments to buy, the buyer’s solicitor will need to check the exact cost of the ground rent.
Service Charge
The service charge is typically charged annually, and goes towards paying for the maintenance, insurance and management of the communal parts of the building. This can include paying for utilities and cleaning in the communal areas.
Sinking Fund
A sinking fund is contributed to by leaseholders over the long term, with the intention of using the money to pay for large, expensive repairs such as replacing the roof of the building.
Reserve Fund
A reserve fund is similar to a sinking fund in that it is contributed to by leaseholders over the long term, but is treated as a reserve to cover underestimated spending that the service charge doesn’t cover.
Should I Buy a Leasehold Property or a Freehold Property?
Typically, freehold properties tend to be houses and leasehold properties tend to be flats. However, this is not always the case when looking at a flat or house for sale and so buyers should always check with their solicitor and the estate agent before committing to a purchase.
If you intend to purchase a leasehold property you will need to have factored the annual charges into your budget, and make sure you are aware of lease restrictions. You will also need to be aware that lenders are unlikely to lend money for leasehold properties where the lease is less than 70 years long, and extending a lease can sometimes be a long and expensive process, depending on the freeholder.