What’s the Difference Between Freehold and Leasehold?
Most home buyers in the UK have two main options when choosing a property: it will usually be offered freehold or leasehold. With freehold, you will own the property and land. With leasehold, you’ll own the property for a fixed period of time but not the land it is built on.
Homeownership in the UK comes in two main forms: freehold and leasehold. Understanding the difference between the two is really important before you go ahead with a home purchase, as they come with very different costs and responsibilities.
What is freehold?
Owning a property on a freehold basis means you own not just the building itself, but the land it stands on.
You are responsible for looking after everything to do with the property, from your possessions inside, to the walls and roof of the building’s outside structure.
As a result, if you want to make any changes to the property’s structure ‒ such as adding an extension ‒ you are free to do so, as long as you have any necessary planning permission from the local council.
Can I buy the freehold?
If you are a leaseholder, then you can look into buying the freehold of your property. For example, If your property is a flat, you may be able to buy a share of the freehold, which you would own alongside the other flat owners. If the property is a house, you may be able to buy the full freehold.
This can be a lengthy and expensive process, and it’s well worth getting expert legal advice.
How much does it cost to buy a freehold?
The cost of buying a freehold varies significantly for many reasons, just like house prices. But, generally speaking, the shorter your lease the more expensive the freehold will be.
You’ll have to cover other costs on top of the sale price of the freehold including:
- stamp duty
- legal fees
- valuation fees
- Land Registry fees
- the freeholder’s legal and valuation fees
Buying the freehold can be a very complex process, especially if there are many tenants involved. So it’s important to seek independent legal and financial advice before taking on the task to avoid any expensive mistakes.
What is a flying freehold?
A flying freehold is a property that is built over land but isn’t part of the property. For example, if one freehold property hangs over another. Flying freeholds tend to happen in the following situations:
- houses built on steep hills
- rooms built across passageways
- basements vaults
It’s important to check whether a property has a flying freehold before applying for a mortgage. Some providers won’t lend for this type of property, while others may have restrictions.
What is a leasehold property?
Leasehold is rather different from freehold. You effectively lease ownership of a property for a specific period. This tends to be over a lengthy period, but can vary from anywhere between 40 to 999 years. However, as a guide this is often 90 or 120 years.
You will have a contract with the freeholder of your property, which sets out precisely what you are responsible for. You will likely be required to pay certain annual costs, such as ground rent, while you will also be required to contribute towards maintenance and service charges.
Generally, you will need to get permission from the freeholder to carry out any major works to the property, while there may also be limitations on things like keeping pets.
Should the lease expire, then the full ownership of the property will revert to the freeholder.
Leasehold is usually reserved for flats and apartments, but this has not always been the case. Many older properties in England, Wales and Northern Ireland are on leaseholds and, in recent years, there have been a number of new-build homes sold in this way. In 2019, the UK government banned this practice, ensuring that all new-build homes are sold as freehold.
Can you extend a lease?
You can apply to your landlord to extend a lease at any time. If you qualify you may be able to extend your lease on a flat by up to 90 years or by 50 years for a leasehold house.
The cost of extending a lease varies and is usually made up of two parts:
- The premium: the agreed price for extending the lease.
- Fees and taxes: this includes the cost of hiring professionals and taxes that may apply.
Using the Leasehold Advisory Service’s (LAS) lease extension calculator can give you an estimate of how much extending your lease will cost.
Should I buy a leasehold house?
Whether or not you buy a leasehold or freehold property will largely depend on availability and your financial circumstances.
If you are considering a leasehold property, it’s important to be aware of additional fees you’ll need to cover such as ground rent and services charges. Depending on the terms of your lease, the freeholder may increase these fees every few years, making them significantly more expensive in the future. Similarly to mortgage payments, your home may be repossessed if you can’t cover the cost of your ground rent.
It’s also vital to check how long is left on the lease. It may be difficult to get a mortgage for a property with a lease of less than 80 years. And a lease of fewer than 70 years can severely affect the value of the property.
The cost of extending a lease can be expensive, so it’s something to think about before buying a leasehold property. In some cases, you may be able to use a short lease to negotiate a lower price for the property or to get the seller to cover the cost of renewing the lease themselves at their current asking price.
You should also check the terms of your lease to avoid any surprises – for example, if there is a ban on having pets or restrictions on home improvements.
The pros and cons of freehold vs leasehold ownership
There are advantages and disadvantages to buying both freehold and leasehold properties.
Advantages of buying a freehold property
Advantages to buying a freehold property include:
- Full ownership: You’ll have complete ownership of the property and land (so long as you keep up with your mortgage repayments, and/or pay off your mortgage).
- No charges: You won’t have to pay ground rent, service charges, admin fees to the landlord.
- Flexibility: You can do what you want with your home – for example, having pets or making home improvements, within the permissions of the local authority or council.
- No Lease: You don’t have to keep track of when the lease runs out or pay to extend it, which can be very expensive.
Disadvantages of buying a freehold property
Some disadvantages of buying freehold property include:
- Expensive: Freehold properties usually cost more to buy because you own the land as well as the property itself.
- Property type: Freehold properties tend to be houses rather than flats, so if you are looking for a flat this could limit your choices.
- Maintenance costs: You will be responsible for the upkeep of the whole property and for paying buildings insurance.
Advantages of buying a leasehold property
Some of the advantages of buying a leasehold property include:
- Cheaper properties: Leasehold properties tend to be cheaper than freehold properties. However, this is due to the risks involved.
- Less responsibility: The freeholder usually manages maintenance for the building and communal areas and arranges buildings insurance.
Disadvantages of buying a leasehold property
The disadvantages of buying a leasehold property include:
- Limited ownership: Leaseholders effectively rent from the freeholder and don’t have exclusive ownership over the property and land it sits on.
- Rent and fees: On top of your mortgage, you’ll have to pay ground rent and services charges which can increase. If you don’t keep up with these payments, your house can also be repossessed.
- Restrictions: You’ll need written permission from the freeholder to make changes to the property and may have to pay additional fees.
- No pets: Some leasehold properties ban owners from having pets.
- No businesses: You might not be allowed to run a business from home.
- Conveyancing fees: These tend to be more expensive for leasehold properties.
- Selling: It’s harder to sell a leasehold property with a shorter lease, which means you may miss out on profiting from property price growth.
While buying a property freehold or leasehold are the two main ways to own a property in England, Wales and Northern Ireland, it is worth noting that in Scotland, properties are either available freehold or under a third type of ownership, known in the rest of the UK as ‘commonhold’.
Under Scottish law, long leases were converted to full ownership in the Long Leases (Scotland) Act 2012. This means that homeowners own the freehold of a flat in a building without a time limit, and will pay a service charge – called a ‘factor’ in Scotland – to maintain the common parts, which are jointly owned and managed by all the flat owners.
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John Fitzsimons has been writing about finance since 2007. He is the former editor of Mortgage Solutions and loveMONEY and his work has appeared in The Sunday Times, The Mirror, The Sun and Forbes. Read more
Brean is a personal finance writer at NerdWallet. She covers a range of financial topics and has written for consumer titles including Which?, Moneywise and The Motley Fool. Read more