Differences between Freehold and Leasehold Property Ownership
Real estate can seem like a complicated maze of words, processes, and jargon that can be hard to understand. One important difference that often leads to misunderstanding is the difference between freehold and leasehold properties, which is about who owns the property.
Whether you're a first-time home buyer, an investor looking to diversify your portfolio, or merely interested in the dynamics of the property market, understanding these terms is crucial. We will be diving into the fundamentals of leasehold and freehold properties, their advantages, and drawbacks, along with some vital, often overlooked aspects of both.
Differences between Leasehold and Freehold
Difference 1: Definition
Leasehold Property: A Leasehold Property is leased from the landlord for a fixed period of time, in which the property owner will have ownership rights on the building but not the land it's built on.
Freehold Property: A Freehold Property is where the property buyer or owner has complete control over the land as well as the property built on it with much more flexibility to use and modify the property as they wish.
Difference 2: Freehold vs Leasehold Property Ownership Rights
In a leasehold property, the leaseholder can use the property for the lease duration, but they have limited rights to modify or alter the property as specifically mentioned in the lease agreement. In a freehold property, the owner (freeholder) has complete control over the property and more flexibility to make alterations and renovations as they wish, without any external approvals.
Also Read: Process of Buying a Home
Difference 3: Duration of Ownership
Leasehold properties provide you the "right to occupy" the same land, building or flat for a set time. The "lease duration" might last from 30 years or 60 years and extend up to 99 years or even 999 years, depending on the landlord's agreement. Once the lease term expires, property ownership reverts to the original landowner (freeholder), unless the first lease term was renewed/extended.
The freehold property ownership lasts indefinitely as they can be passed onto the future generations too.
Difference 4: Cost of Purchasing Leasehold vs Freehold Property
The upfront costs of purchasing a leasehold property can be quite cheap, whereas the freehold property costs a lot more expensive initially as you will be buying the building as well as the land it's built on.
Difference 5: Additional Expenses after Buying
When you purchase a leasehold property, you need to pay ground rent to the land owner every year for using the land during the lease tenure. However, when you purchase a freehold property, you need not pay any rent as you are the exclusive owner of the land, but you will have to pay the annual property tax to the government.
Difference 6: Maintenance Costs & Responsibilities
As a leaseholder, you are responsible only for daily maintenance and minor repairs at the property. But, as a freehold property owner (freeholder), you will be responsible for the regular repairs, significant renovations, and maintenance of the property.
Difference 7: Right to Sell/Transfer the Property
A leasehold property can be sold or transferred to another person, but specific approvals need to be taken from the concerned authorities. However, a freehold property can be sold, transferred, or gifted to others or another family member as per the owner's wish.
Also Read: How to Verify the Property Ownership
Difference 8: Availability of Financing for Leasehold vs Freehold
Banks/financial institutions are reluctant to finance or provide loans for leasehold property purchase as they are high risk, especially for a short-term leasehold (which has a tenure less than 30 years).
Freehold properties have more stability as the ownership rights are absolute making it a more secure financial option for banks for which they can easily offer loans even at lower interest rates.
Difference 9: Future Property Depreciation Value
For a leasehold property, as the remaining term of the lease decreases below a certain threshold (typically 80 years in India), the property value can also decrease, and this could affect your return on investment if you plan to sell in the future.
Freehold properties generally have a more stable value compared to leasehold properties, as there is no lease expiration date. However, the market conditions and economic trends can still result in fluctuation of the property value.
Also read: Is it Better To Rent or To Buy a Home
What to Consider when Choosing Freehold vs Leasehold Property
Can I extend the lease on a leasehold property?
Yes, in most cases, you have the right to extend the lease on a leasehold property, but there will likely be a significant cost associated with this. It's advisable to extend the lease while it still has plenty of time left as costs rise sharply when the remaining lease term falls below 80 years.
Will you live in the property or rent it out?
If you're planning to live in the property, a freehold might offer more freedom and stability. On the contrary, if you're thinking of renting it out, a leasehold might be a more affordable option, especially in prime locations with high rental yields.
Do you want responsibility for all maintenance and repairs?
With a freehold property, you are solely responsible for all upkeep, which can be time-consuming and costly. Leasehold properties often include maintenance and service costs in the lease agreement, which can be a more manageable option.
Are you willing to pay ground rent and service charges?
These are common expenses for leasehold properties that can add up over time. If you'd prefer to avoid these ongoing costs, a freehold property might be more suitable.
In this blog, we've delved into the key aspects of leasehold and freehold properties, explored their advantages and disadvantages, and brought to light some often overlooked factors. We've also shared some practical tips on what to look for when buying these properties.
Choosing between a leasehold and a freehold property is a significant decision, one that depends on various factors, including your budget, long-term plans, negotiating skills and the degree of responsibility you're willing to take on.
Our parting advice for prospective property buyers is to carefully consider your options, understand the legal and financial implications, and seek professional help when necessary.