What should you know about leasehold vs freehold ownership in London?

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paying-service-charges

The leasehold and freehold laws are something that in the UK make property very appealing for foreign investors. In this article, we go over what the difference is so you can begin with the process of buying a property if that is what you’re after.

What is the difference between Leasehold and Freehold property?

To begin, what is the difference between the two in terms of definitions?

What does leasehold mean?

A leasehold property refers to a type of property in the UK where a person (known as the leaseholder or lessee) holds a temporary right to occupy and use a property owned by another party (known as the lessor or landlord or freeholder) for a specific period of time, as outlined in a lease agreement. For a full definition on what the laws are concerning leasehold property, visit this link.

What does freehold mean?

When you own a freehold property, you have full ownership rights over both the land and the building on it so you have ultimate control. You don’t just own it for a limited time, but for as long as you want, or until you decide to sell it. For full governmental advice on the definitions and laws involved with freehold, click here.

What are the key differences summarised?

Criteria Leasehold Freehold
Have to Pay Service Charges Yes No
what is th cost of Purchase? Lower initial cost, higher maintenance costs Higher initial cost, lower maintenance costs
What is the availability? Common for flats and apartments Common for in all property types
Is it new build property? 99.4% of new builds are leasehold property* 0.6% of new builds are freehold
Available for first time buyer scheme? (5% deposit) Yes No
Are there restrictions with maintenance and repairs? Most of the time, depending on agreement Never, free to alter the property how you want

*London’s new-build market saw just 2 freehold transactions in 2022 making up just 0.6% of new build property sales in the capital. Read more here

The upcoming changes to leasehold property

There are a few upcoming changes to be aware including that ownership is changing to suit the landlord and there are potential service charges that will be brought forward. As well as this, remortgaging will change as well as the shared areas of the proeprty. 

The difference in property ownership

The key difference in property ownership between leasehold and freehold is the length of ownership. Leasehold properties are sold on leases with a set number of years remaining, while freeholds have no time limit on ownership.

The draft Leasehold Reform Bill aims to allow leaseholders to extend their leases up to 990 years, compared to the current limit of 90 years. This would effectively turn many leaseholds into “virtual freeholds” with extremely long ownership periods. However, true freehold ownership still conveys more control and avoids potential issues like ground rents.

Potential service charges

Leasehold properties often have service charges payable to the freeholder for maintenance of shared areas or services. The draft reform bill does not directly address regulating these charges, so variable and potentially onerous fees may still apply to leaseholds even after reform. This remains a point of concern for many leaseholders.

paying-service-charges

How remortgaging differs

Banks typically refuse to offer mortgages on leasehold properties with less than 70-80 years remaining on the lease. This can make remortgaging difficult if the lease length drops too low over time. The 990 year lease extension allowances aim to minimize this issue, but the reforms do not equalize leasehold and freehold treatment for lending purposes.

Shared areas of the property

Many leasehold properties share common areas with other residents of the building or development. These can include hallways, gardens, parking facilities etc. The responsibility for maintaining these areas is not changed by the reform bill. Leaseholders will still need to coordinate and fund this upkeep through service charges or specific agreements, unlike freehold owners who control their own outdoor space.

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What are the benefits to buying a leasehold property?

When comparing leasehold and freehold and looking at the pros and cons of each, it is important to remember that freehold property are those that are owned forever until the landlord chooses to sell. There are no third parties or other people able to influence the deal once a mortgage on a freehold property has been paid off.

Leaseholds, on the other hand, are often new builds that the freeholder pays for services and amenities on and there are schemes available for leasehold property that wouldn’t otherwise be available.

Benefit 1: Cheaper purchase price

Leasehold properties often sell for 20-30% less than comparable freehold homes. This is because the buyer only purchases the right to live in the property for the term of the lease, not the land it sits on. So they do not pay for full ownership.

The limited lease length also lowers resale value over time as the lease gets shorter. This trade-off makes leasehold flats affordable entry points, especially in desirable areas.

cheap purchase price

Benefit 2: There are schemes available for leasehold property

Many leasehold properties are new builds, which qualify for government schemes like Help to Buy and First Homes to assist first time buyers. These can lower deposit requirements or provide equity loans/discounts.

Leaseholds also fall under Right to Buy, allowing council tenants to purchase their rented accommodation. And shared ownership schemes allow buyers to purchase just 25-75% initially and pay rent on the remainder.

Benefit 3: Concierge and building services are often available

Many modern leasehold developments come with luxury amenities like 24/7 concierge service at the front desk. Some also offer in-house maintenance, private gyms, cinema rooms, co-working spaces, and more. These services make leasehold flats feel more like living in a resort than a traditional apartment block.

Working out what a good amount is for a service charge

Service charges on leaseholds should generally not exceed 1-2% of the property’s purchase price per year. So for a £300,000 flat, reasonable service charges would be £3,000 – £6,000.

This covers costs like building insurance, cleaning of common areas, garden/parking maintenance, etc. Cozee Properties are the leading premium estate agent in London for modern developments. They always showcase the highest quality new build flats in the best postcodes, with the lowest service charges.

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Cozee new builds all have excellently priced service charges so you don’t worry about any issues

Benefit 4: Leasehold properties are often new

New build leasehold flats are constructed to modern specifications with the newest appliances, fittings and layouts. They utilise improved soundproofing, energy efficiency standards, fiber broadband, underfloor heating, air filtration and more. This makes them more luxurious and easier to live in than outdated freehold houses.

Benefit 5: Community living

Purpose-built apartment blocks and developments with communal gardens, gyms or parking tend to be leasehold properties. Sharing these spaces and managing them jointly creates a built-in community and opportunities to cultivate relationships with neighbours. This appeals to many buyers and provides a warmer, friendlier living environment than stand-alone houses can offer.

shared living of a leasehold property

This is great considering new changes in regulations make leasehold and freehold almost the same and leaseholds are now owned for 999 years. So, those who want to own a home and also have a sense of community living can do both without having to sacrifice too much in the length of time a property is owned.

What are the benefits to buying a freehold property?

There are three main benefits to buying freehold property. First of all, the ownership of a house is permanent and the value of the property is a bit more predictable.

Finally, there are a series of reasons why freehold property is less restrictive once bought. Read on for more

Benefit 1: Ownership is permanent

With a freehold, you purchase the property and land outright, not just a time-limited lease. This means full control and no expiration on ownership, allowing you to sell, rent out or modify the property however you choose in perpetuity. Leaseholds eventually expire and possession reverts back to the freeholder.

Benefit 2: A property’s future value is predictable

Freehold values strictly follow market trends in the area without lease constraints. So if nearby sold prices rise 20% over 5 years, you can expect similar appreciation.

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Leaseholds become harder to predict as the lease length shortens, making re-sale and remortgaging more difficult. This uncertainty rarely applies to freehold.

However, not all leasehold are unpredictable in value, especially those in London. Data from The Office of National Statistics show that london house prices are consistently higher and most consistent in the capital and Cozee specialise in property in this area.

To benefit from all of the pros of buying a leasehold property without the downside of an unpredictable property value, get on a call with Cozee today.

Benefit 3: Freehold property is less restrictive for the buyer

Freehold purchases follow a straightforward conveyancing process with no lease terms to decipher or extensions to worry about.

Leaseholds often come with complex service charges, ground rents, permission procedures for alterations, limitations on usage, and other legal intricacies that make buying/owning them more complicated.

Freehold owners can undertake renovations, extensions, layout changes or exterior modifications without requiring approval from a third party.

Lease terms often restrict what alterations leaseholders can make and mandate certain standards be maintained. With a freehold, you answer only to the local council planning rules.

Cozee leasehold deals are flexible and easy-to-understand!

Cozee have easy-to-understand deal structures along withpremium leasehold amenities like 24/hour concierge and private gyms

Beyond home modifications, freeholders choose all services from Internet providers to maintenance contractors. They are not obliged to use a buildings pre-approved suppliers or pay for communal amenities they don’t want or need. Leaseholds usually have mandatory service charges and preferred suppliers regardless of usage or preference.

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