Leasehold vs freehold – what to consider

December 8, 2020

With the UK property market more challenging than ever to get a foothold in, budding first-time buyers are looking for alternative means of ownership. This has brought the leasehold versus freehold debate further into the limelight, but what are the two ownership formats, and which is the better move?

Defining leasehold and freehold

Before we get into the pros and cons of the two hold types, it’s best to define what they are first.

A leasehold is effectively a long-term rental agreement that sees you lease the property from a landlord (the freeholder) on a fixed long-term contract. Contract lengths typically range from around 90-120 years but can sometimes be as high as 999 years or as low as 40. The method of ownership in a leasehold sees you own the property for the agreed term, but not the land it stands on – that still belongs to the freeholder. In London, most owned flats are under leasehold agreement.

A freehold gives you outright ownership of the property and the land it stands on. There is also no time limit to the period of ownership – under a freehold the property is yours for as long as you want it.

The case for a leasehold

A leasehold offers a number of advantages to a would-be buyer:

  • Leasehold properties are typically cheaper than freehold properties, with their value very much dependent on the length of the lease term remaining
  • Just as with renting, you’ll usually have less responsibility towards maintenance and repairs on the property
  • Leasehold is a better bet for those needing a short-term solution
  • Leasehold agreements can turn into freehold in some cases, making a leasehold a good starting block for ownership in such circumstances

The case for freehold (or rather the case against a leasehold)

With a freehold agreement, the primary benefit is outright ownership, which means you’ll avoid many of the disadvantages associated with a leasehold and enjoy much more of a free reign on the property:

  • You won’t have to pay service charges and ground rent (which can be subject to rising), as you are the freeholder and owner
  • You’ll be able to make changes to the property how and when you please
  • You’ll be able to own pets, which is typically not permitted in a leasehold
  • You’ll be able to sublet the property as you please (again, a possibility with a leasehold but not in many cases)
  • You won’t need to worry about contract length and terms or be wary of diminishing value on the property because you’re nearing the end of a lease.
  • Conveyancing fees are typically lower on a freehold

Which is better?

So, which is the better option for a first-time, or indeed any, buyer? If money was no object, the answer would always be freeholding, as you own the property and then can do what you please with it – whether that be home improvements or put it out for lease. Owning a freehold property is owning on your terms, not someone else’s, meaning you won’t be subject to any unwanted surprises, be it increasing rent or changing service charges.

In most cases, however, money is very much a factor, which is why leasehold agreements play such a prominent part in modern home ownership. If you are budgeting and managing your finances stringently in order to get a foot on the property ladder, leaseholds provide an accessible entry point that can built to something more established, like a freehold, in the future.

It’s very much a similar argument to buying versus renting. Of course, everyone would buy if they had the money, but many don’t, and in the meantime can take advantage of a lease agreement that gives them diminished responsibility and the extra costs that come with home ownership. In conclusion, while a freehold property should be the ultimate goal for many buyers, a leasehold agreement offers a long-term solution on more accessible terms, which is a highly valuable commodity in the modern market.

 

Urban Splatter

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