New research shows that leasehold homes could be the best option for first-time buyers because they provide a much more affordable foot on the property ladder than freeholds do.
First of all, what is the difference between a leasehold and a freehold?
Freehold
This is the most straightforward form of property ownership, freehold means you own the entire property outright, including the land it sits upon, for an unlimited amount of time. On the Land Registry, it will state that you own the ‘title absolute’. You also have ownership of the airspace above the property and, theoretically, the earth beneath it, should you wish to dig down to create a cellar or bunker, if that’s your sort of thing.
If you’re looking to buy a house, as opposed to a flat, a freehold is much more common than a leasehold.
Leasehold
With a leasehold, you own the property itself (everything inside the walls of the home), but somebody else owns the land it sits on and the land/building around it. Leaseholds are common when it comes to buying a flat, less so when buying a house.
Importantly, leaseholds are rarely infinite – they come with a timeline. In theory, this means your ownership of the property could eventually come to an end. However, leases often run for 90-100 years and can even be as long as 1,000 years, so, unless you’re hoping that your home will be passed down through generation-after-generation of your family, you’ll not need to worry about the lease expiring.
So, why are leaseholds a good option for first-time buyers?
The new research, conducted by Warwick Estates, shows that leasehold homes in England sold for an average of £200,000 in 2020, 33% less than the £267,500 required to buy a freehold.
While buying a leasehold brings more complications and variables than a freehold, this significantly cheaper price tag makes them a great first step for people looking to move from renting to freehold ownership.
When approached from this angle, the potential downsides of leaseholds (the fact that you are at the mercy of a freehold owner/building owner) are mitigated by the fact that you don’t intend to live there for very long. Instead, you take the opportunity to purchase an affordable home, escape the money-draining trap of monthly rent payments, and start building yourself to a place where you can comfortably afford to purchase a freehold home.
When thinking about using a leasehold as a stepping stone, the idea of buying a flat must be seriously considered. The vast majority of flats are sold as leaseholds due to the fact that someone owns the whole building and you only buy one small part of it. Buying a flat can be an affordable way of getting onto the ladder for a few years while saving for that eventual freehold purchase.
Now, it’s important to consider the ongoing external cladding scandal that surrounds flats in the UK, so any purchase must take this into consideration. Before buying a leasehold flat, check that the external cladding has been certified as safe beforehand progressing. If not, you could end up with a steep bill for replacing the cladding, a cost which many building owners are refusing to cover.
Leasehold properties have long been considered less desirable than freeholds, but as property prices continue to skyrocket out of kilter with average earnings, the more affordable route to ownership they offer should now be a serious consideration for first-time buyers.
