What are the differences between Freehold and Leasehold?
Outright ownership of the property and land on which it stands. A freehold estate in land (as opposed to a leasehold) is where the owner of the land has no time limit to his period of ownership. It is generally considered to be superior to all types of land ownership because it has no limitations. A freehold title can be bought and sold, and the owner of the title is registered at the Land Registry.
A method of owning property (usually a flat or apartment) for a fixed term but not the land on which it stands. Possession of the property will be subject to the payment of an annual ground rent. When the lease expires, ownership of the property reverts back to the freeholder. Nearly all flats or apartments are leasehold. The leaseholder is granted ownership of the property for a specific term by the owner of the freehold, the terms being set out in a lease. Like the freehold, this is also a title which can be bought and sold, and the owner of the leasehold title is registered at the Land Registry.
- Lease lengths vary and the most common are 99, 125, 500 and 999.
- Mortgage lenders like there to be at least 50 years left at the end of a mortgage term (e.g. a 75-year lease for a 25-year mortgage).
- The lease includes enforcement covenants, rights of way and access, repairing and maintaining covenants, details of ground rent.
- The lease length may be extended by agreement with the Freeholder at an agreed cost.
- A service charge is usual but is not essential; some blocks have a separate managing agent employed by the Freeholder.
- Share of Freehold is when the Freeholder divides up his responsibility and the leaseholders become directors of their leasehold company.
Short Lease Term
For leasehold properties, mostly flats, apartments and maisonettes, a short lease can make sourcing a mortgage on the property more difficult. A lease term lower than 60 years is deemed as short.
As a rule, properties with shorter leases can negatively affect the property value as the property may be entirely unmortgagable and therefore can only be purchased in cash. Acquiring a new lease from the freeholder is seen as another cost to any potential purchaser which could be seen as off-putting.
Do I need to extend the term of my lease?
When the term of a lease falls below 99 years, the value of the property may start to decrease. Once the lease drops below 80 years, it decreases in value faster and you may encounter problems selling or obtaining a mortgage on the property.
The 1993 Leasehold Reform Act usually means that 90 years can be added to a lease at a fair price. The problem of short-term leases affects more than purchases. If you already own a leasehold property and you wish to remortgage it as the owner or landlord, the lease term will be considered at the mortgage underwriting stage of the process.
It is not only mortgages for purchases than this affects, if you already own a leasehold property and you wish to remortgage it as the occupier or landlord, the lease term will be brought into consideration at the mortgage underwriting stage of the process.
We can help
If you have questions about purchasing or remortgaging a property with a short lease, please contact us.Get in touch to discuss your options