On a basic level, leasehold and freehold are the two different forms of legal ownership relating to a property.
Whether a house is leasehold or freehold is a hugely significant factor when you weigh up whether or not you should purchase a home, and properties that are freehold are often more valuable.
Leasehold ownership means that you own the property for a fixed amount of time, but you do not own the land on which it stands, or the building it is in. When the leasehold contract ends, the home reverts back to the freeholder.
Most flats are leasehold and there’s usually an annual ground rent charge in addition to the cost of the home. This money is used for maintenance of shared areas such as communal hallways.
Leasehold contracts are usually long-term and can vary hugely, typically covering everything from 1 year to 999 years. It’s vital that you take into account how long is left on the lease when you buy a leasehold property, especially as properties that only have a short leasehold contract left can drop in value significantly.
It’s also worth bearing in mind that to get a mortgage for a leasehold property, lenders usually like there to be at least 50 years remaining, on top of however long your mortgage term is. That means that if you take out a 25 year mortgage on a leasehold property, lenders will typically require a minimum of 75 years left on the leasehold contract.
Leasehold flats can ultimately work out as more expensive as the various costs add up, and can be a financial risk if there’s only a short amount of time left on the lease. For example, if at any time you can’t pay the ground rent, you can be evicted and can lose your home, even if you’ve kept up to date with your mortgage payments.
Problems and disputes do crop up with leasehold properties and the Leasehold Advisory Service handled more than 40,000 complaints in the year 2011-12.
Enfranchisement, the process of extending the lease once you reach the end of your leasehold contract term, or buying a portion of the freehold, are both often possible with leasehold properties.
Freehold ownership normally means that you own the property and the land on which it stands for a fixed amount of time. Freehold usually applies to houses as the majority of flats are leasehold. As this form of ownership is more conclusive, freehold houses are usually more sought after than leasehold houses.
If you’re a freehold owner, you have full responsibility for maintenance and repairs, although you still have to adhere to property related laws regarding things such as planning permission. Freehold is the most common kind of lease in the UK.
Commonhold ownership is type of freehold. The shared parts of the building such as hallways and stairways are managed by a Commonhold Association, which is owned by the various commonhold owners of the flats. In the UK this is really rare and there’s only a few dozen cases of it being used across the country.