Mortgages and the difference between Freehold & Leasehold?

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In England and Wales there are 2 types of property ownership, those options are Freehold and Leasehold. The 2 differ quite significantly so this post aims to give some details on Mortgages for Freehold & Leasehold properties.

The easiest way to explain the difference is to think about a house. With a leasehold property, you own the house but not the land it sits on. With a Freehold property, you own both the property and the land it sits on. As you might expect, this does have a bearing on mortgages.

Leasehold properties

Leasehold properties in my opinion come in 3 variances. The first is, the old style leasehold properties, typically landowners would build houses and put them on a 999 year lease. These incur ground rent of a nominal amount (sometimes referred to as “peppercorn rent”) up to around £5 a year.

The second type of leasehold property is usually a flat/apartment. If it is a purpose built block of flats, then there will be ground rent and a management fee/service charge. These costs are more than the old style leasehold properties, however they typically also include things like buildings insurance, maintenance and so on. Leases usually start at around 125 years.

If the flat is a converted house (typically a maximum of 2 to 4 flats) then there may not be any ground rent or service charge, but costs for maintenance would need to be shared between the flats as and when.

The last type is the more dubious type of leasehold properties you may have read about recently. This is where developers have put relatively short lease on properties of around 100 years (or less) knowing that in around 30 years (for mortgage purposes), people would need to pay to have them renewed.

This has now been outlawed but there are properties around that fall under this type of lease.

Freehold Properties

This is relatively simple by comparison. A freehold property is where you own the land and the house itself. There is no ground rent or management fees and any costs for maintenance would be met 100% by the home owner.

Is Freehold or Leasehold better?

There is no set answer to this, you would not usually be able to buy a freehold flat, having a lease ensures everyone knows what needs to be paid and when. It also allows you to budget to some extent for any big jobs. The downside is that in order to get a mortgage, there typically needs to be around 70 years remaining on the lease at time of purchase. The value of the property will start to decrease as the lease does and it can cost thousands or even tens of thousands to renew the lease.

What should I look for in my lease?

When buying a property, your solicitor will look through the lease and make you aware of any potential issues. But from a practical point of view, you should be looking at how long is left on the lease, if less than 75 years, then maybe an idea of cost to renew. How much the ground rent is, typically this will be a nominal amount, but it is worth checking as some of the more recently built properties have pretty expensive ground rent charges, they have become known as “fleecehold”.

What minimum lease will lenders accept?

When it comes to getting a mortgage on a leasehold property you may think that so long the mortgage term ends before the lease that the lender would be happy?

However, most mortgage lenders have their own criteria in this regard so it pays to use a Whole of Market Broker such as ourselves so that we can find the right profile of lender for your property and your circumstances.

For example, some lenders are happy if the lease is 20 or 25 years greater than the mortgage term, whilst others wish to see 80-90 years unexpired at the mortgage term outset.

As in all applications, the personal circumstances are of great significance but whilst leasehold properties and mortgages for purchase or home movers are subject to less strict leasehold considerations, Mortgages for equity release (or lifetime mortgages) are considered very differently.

Mortgage Success are a Manchester Mortgage Broker. We are a Whole of Market broker that isnt tied or affiliated to any one lender so we can find the best mortgage for our clients individual circumstances.

Feel free to email, use our contact form, request a call back or pick up the phone and ask us any questions about Mortgages for Freehold & Leasehold properties.