Five things to check before you decide to purchase a leasehold property

In the past leasehold properties were mostly limited to flats. But more new builds are being sold under leasehold. It’s led to homeowners being frustrated at the situation they’re left in. 93% state they would not buy another leasehold property, according to research from the National Association of Estate Agents (NAEA).

What is a leasehold?

Most houses are sold under a freehold agreement. This is where you have ownership of both the property and land on which it stands, with no time limit.

In contrast, leasehold properties are owned for a fixed term, which will be set out in your lease. However, you do not own the land it stands on and will need to pay annual ground rent for this. You may also need to pay maintenance fees and other charges. Once the lease is up, the ownership of the property reverts back to the freeholder.

It’s standard for flats to be sold as leasehold. But, there’s been a growing number of houses that are sold in this way. It offers housebuilders an extra income stream, making it an attractive option for them.

However, purchasing a leasehold is often a decision homebuyers regret. The NAEA research found:

  • 94% of leasehold homeowners regret buying a leasehold
  • 51% feel like they’re paying for the same thing twice with ground rent and council tax
  • 62% of leasehold homeowners feel like they were mis-sold
  • 50% of leasehold homeowners were first-time buyers

The findings suggest that many leasehold buyers weren’t aware of exactly what they were buying. As a result, they face unexpected costs and challenges:

  • 75% were unaware of the costs when making alterations to their property, which one in 10 have to pay
  • 57% didn’t understand what being a leaseholder meant until they had already purchased the property
  • 48% were unaware of the escalating ground rent

With some ground rents rapidly increasing and homeowners facing costs for decorating their homes, being a leaseholder can be costly. But the challenges of selling their property when the time comes to move can be even more worrisome

  • 31% of those currently trying to sell their home are struggling to attract a buyer because they don’t own the freehold
  • 25% have had interest from house hunters who were then deterred when they found out the property was leasehold
  • 18% have actively tried to buy the freehold of their property to make it more attractive; a further 41% are considering doing so

While many leaseholders regret purchasing a leaseholder property, it doesn’t mean it’s an option you should discount right away. In fact, in some areas, especially in central city locations, you may have little option to purchase a freehold property.

However, understanding what you’re buying is key. You should carefully look at the terms of your lease to grasp potential charges and restrictions. Among the things to check when you’re thinking of buying leasehold are these five areas:

1. The length of the lease

The length of the lease is the first thing you should check.

Leases are usually long term, often 90 or 120 years. However, they can be as long as 999 years. Of course, this figure starts from when the lease was first sold. So, if you’re buying a property from another leaseholder it’s important to check how long is left.

If you’re using a mortgage to purchase the property, the less time left on the lease, the more you’ll struggle to secure approval from a lender. As a general rule, you should look for a lease that has at least 70 years remaining.

You should also see if it’s possible to extend the lease and whether purchasing the freehold is an option.

2. Cost of the ground rent

As you don’t own the land your property is on, you will need to pay ground rent.

There are two steps to take here. The first is to ask how much the ground rent is now. The second is to check the terms of the lease and see how much it can increase by.

On average, leaseholders have seen a 5% annual increase in their ground rent, according to NAEA. It can seem like a small rise at first glance. But it’s one that can quickly add up when you look at it over the long term.

It can be a big concern for leaseholders. 36% said they can afford to pay the bill now but wouldn’t be able to if it increased further.

3. Service, maintenance and other fees

You may also be liable for other charges. The freeholder will usually be responsible for the building. But can ask you to contribute to costs associated with this, depending on the terms of your lease.

Typically, this is done through set payments. For example, you may pay a service charge that will cover buildings insurance and pay into a reserve fund to help cover maintenance and repairs.

4. Cost of alterations

When you move into a home, it’s natural to want to put your own stamp on it. You’ll no doubt have plans for decorating and may even want to take on a larger project. But alterations to your leasehold property can be more than expected.

Some 10% of leaseholders have to pay to update their home. When you may already be paying for materials and professionals to carry out work, these extra charges can stretch your budget.

Charges vary depending on the terms of your lease, so it’s important to carefully check what additional costs you could face. However, on average, the most expensive alteration is adding an extension, such as a conservatory, at £1,597. This was followed by installing new bathroom units (£1,472) and upgrading to double glazing (£1,422). Even simple cosmetic changes, such as adding new blinds, can come with an additional fee, averaging at £527.

5. Other restrictions

On top of these factors, you should also look through the terms of the lease for other restrictions. In some cases, restrictions won’t affect you now but will in the future. For example, some leaseholds don’t allow pets. So, it’s important to be aware of what they are, even if they won’t impact your lifestyle now.

The NAEA also found that some leaseholders faced restrictions to their lifestyle that came with charges. Shockingly, 10% of leaseholders discovered they would face a charge for speaking to their neighbour.

Just 16% said they understood the terms of their contract and thus expected charges beforehand.

If you’re considering buying a leasehold property it can be a more complex process, including when it comes to securing a mortgage. For support and guidance throughout, please contact us to find out how we can help you.