Leasehold Property in the UK? Here’s What You Need to Know.
While many dream of owning a freehold property in the UK, leasehold options can be attractive for various reasons, especially when considering flats or apartments. However, it’s crucial to understand the limitations of leasehold ownership before the purchase completes.
What is Leasehold?
There are 2 main types of property ownership in the UK, Leasehold and
Buying a leasehold means purchasing the right to live in a property for a fixed period. Leases typically range from 50 to 125 years or even longer. The land itself belongs to a , to who you’ll pay an annual ground rent. You will also be responsible for contributing to service charges. These cover the building’s maintenance and upkeep and often include insurances for the whole site.
If a lease were to expire on a property, ownership of the property title would pass to the freeholder. At this point the resident in the property would have no ownership rights moving forward. However, a leaseholder can apply to extend the lease. This avoids this happening well before the end of the lease.
Leasehold flats are common within the UK and are preferable to freehold versions at present. There are also some leasehold houses although these are less common overall. Most affordable housing built for shared ownership is on a leasehold setup initially.
Key Points to Consider:
- Lease Length:
A shorter lease can impact your property’s value and marketability. Ideally, if purchasing with a mortgage you should aim for a lease with no less than 70-80 years remaining, and remember, extending a lease can be complex and expensive. Mortgage lenders will always look at the worst-case scenario. Lender’s weigh up the chance of selling the property quickly if it is repossessed. If the property has a short lease remaining, they may struggle to sell the property at a price sufficient to clear any mortgage debt.
Likewise, the property will be hard to sell by the leaseholder. Not having the lease extended will limit the price someone is willing to pay for it. - Ground Rent and Service Charges:
These annual costs can vary significantly, so factor them into your budget. Low ground rent charges might indicate significant price increase are coming in the future. Ground rents do tend to increase in defined periods detailed in the property lease.
Service charges also factor in a reserve fund. Reserves will be used when periods of significant work are planned to take place. For flats this could be renewal of the roof. All flats in the block will need to contribute towards this work regardless of whether they are on the ground or top floor. - Restrictions and Responsibilities:
The lease document outlines various rules and regulations, such as restrictions on pets, alterations, or subletting. Carefully review these to ensure they align with your lifestyle and plans. Unlike a freehold property, some people find the restrictions imposed by a property lease stifling. - Right to purchase the freehold:
Under certain conditions, leaseholders may have the right to purchase the freehold collectively, extending ownership to the building itself. This process, known as enfranchisement, can be complex and requires legal guidance. - Read the lease in detail.
As boring as it sounds, please read the lease document in full. Many people don’t do this and subsequently get caught out by the detail later. As the lease defines your future costs, freedoms and rights, it is vital to understand this information.
Check out our A-Z of mortgage terminology for more details about other ownership types.
Mortgages for leasehold property:
When looking for a mortgage lender to help you purchase a leasehold property some key information will need to be provided. Each lender will have their own set of criteria relating to the lease term remaining. Also, the way ground rent and service charges are calculated may differ. Lender’s will also check if there are any restrictive that they may be uncomfortable with.
The lender will want to know the following.
- The remaining term of the lease now and at the end of the chosen mortgage term.
- Service charges and ground rent fees are factored into the lender’s affordability calculations.
- How often ground rent can be increased by the freeholder. Sums considered excessive may cause an application to be declined.
- Any restrictive covenants that may affect the marketability of the property in the future. Such as not being able to run a business from the property or one that restricts who the property can be sold to.
Not all lenders will provide a mortgage on leasehold houses so check this with your mortgage broker before proceeding with an offer.
Seek good legal advice:
Good legal advice from your solicitor during the purchase of a freehold property is crucial. They can help you:
- Understand the lease agreement: Ensure you grasp all the terms and conditions before signing.
- Negotiate the purchase: Your solicitor can advise on negotiating the price and potentially even the terms of the lease.
- Advice on purchasing the freehold in the future: If you’re considering buying the freehold collectively, your solicitor can guide you through the legal process.
Remember: While leasehold ownership can be a good lower cost option, it requires careful consideration and professional guidance. By understanding the key points and seeking expert advice, you can make an informed decision and ensure a smooth property purchase journey.
Let us know about your experience with leasehold property using the comments box below.
Post compiled by Grant Carpenter CeMAP, CeFA – 15 years of regulated mortgage advice.
Please note that the content listed within this post is purely for information purposes only and does not constitute advice.
