In the UK, the terms freehold and leasehold represent two types of property ownership. While freehold ownership grants an individual complete control over the property and the land it is on, leasehold ownership is a long-term lease or agreement with a freeholder for only the building that is on the land, often this lease agreement stands for an agreed period ranging from 99 years up to 999 years.
Mortgage for Freehold Properties
In the UK freehold properties do offer advantages to the borrower when it comes to securing a mortgage. Such as you becoming the sole owner of both the building and the land it stands on.
As a freeholder, your often won't need to pay ground rent, service charges or permission fees, but you will be responsible for the maintenance of the building. And lenders generally view freehold properties as less risky investments due to the stable and long-term ownership. This could translate into more favourable options when it comes to getting a mortgage approved.
On the flip side though, some lenders may not be eager to consider this type of property due to certain reasons that might not be favourable to the lender. Some of these issues might be disputes that can arise between freeholders, or ease of reselling the property.
Mortgage lenders after all would want to ensure their money is secure with minimal or no complications and on the long run, returnable with interest. There will be lenders who look at these types of properties on a case-by-case basis, and if you meet all the required criteria, they will go ahead with the transaction. You may also want to consult with an experienced mortgage adviser before deciding on a freeholder purchase and a lender just to make sure the path forward is not an unduly complicated one.
Leasehold properties
Unlike in a freehold property, a leasehold property is where you own the building, but not the land that it is on. Leasehold properties are usually rented from a freeholder property owner.
Leaseholder arrangements might seem somewhat daunting or confusing to a person who’s new to the property scene in the UK.
In the UK, a leasehold property is where you own the some or all of the building itself, but not the land it stands on. Instead, you rent the land from the freeholder, typically for a fixed period of time (the lease could range anything from a period of 99 - 999 years).
Since you own the building and not the land, your lease agreement will have certain clauses and responsibilities that you will have to abide by. For example, maintaining the building itself and any fixtures and/or fittings in it. Since you are on a lease, you could be liable to pay a ground rental charge annually. This is due to the fact that you will also be using the land for some of your living and day to day purposes. In addition, there could be service charges that cover the maintenance of some of the commonly used areas.
Unlike in a freeholder property owner, leaseholders may have to comply with restrictions and limitations. Alterations or renovations of the building without the freeholder’s consent or prior agreement, are not permitted. If this property is an apartment complex, accommodating pets may also have its restrictions. And in most instances, subletting is not allowed.
Should I invest in a freehold ownership property?
Purchasing a freehold essentially means you have total and full control over the property. And yes, it does have its benefits. Firstly, you will not be paying any rental, which translates into savings. Being a freehold owner also means that you are no longer under the control of a landlord. If the property concerned is a house, you will be the sole owner, however in the event of it being a flat consisting of multiple tenants, you may encounter some issues when it comes to obtaining the consent of all the occupants agreeing with the purchase. The sharing of common facilities for example might also pose a problem.
As described above, getting a mortgage passed to purchase a freehold can be somewhat of a task. Having a clear credit score in addition to getting a willing lender might pose the biggest obstacles. However, the benefits are apparent. Having a freehold ownership is a definite asset that can potentially bring future value and gain to your investment.
Should I invest in a leasehold property?
Buyers should be reminded that leaseholds can come with limitations on control and potential cost increases. The property being owned by the freeholder, all your decision making regarding the property will have to be in consultation with the owner.
When it comes to mortgages, lenders may look at leasehold properties as risky, but since the actual ownership is with the freeholder, that aspect of deciding the pros and cons lies with the lender who will look at a mortgage from his point of view to ensure the deal goes without a hitch.
In most instances the maintenance of the building and common areas are taken care of by the freeholder. This can be a definite advantage.
As with any investment, you should be mindful of potential future costs. Such as lease or ground rent increases. For advice on a leasehold from a professional mortgage advisor, call us on our hotline or browse our website BVS Mortgages and Financial Services.
Conclusion
The choice between freehold and leasehold ownership significantly impacts your mortgage options as well your ownership experience. While freehold properties generally offer more favorable mortgage terms and greater control over the property, leasehold options can provide affordability and access to a wider range of housing options, and with fewer commitments such as building maintenance. Understanding the variations of each ownership structure and seeking professional advice is crucial before making informed decisions about an investment in the UK property market.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
* Approved by The Openwork Partnership on 11.06.2024
