Homes bought through a lease, better known as leasehold properties, are a form of ownership that's unique to England and Wales. And despite sometimes being tricky to navigate, they are very common.
Approximately 95% of new homes sold in London, and 43% sold across England and Wales, are leasehold properties.
What many people forget is that they are buying the temporary right to use the property; it is not outright ownership like a freehold. So how do they work?
How long is the lease?
Leaseholds used to start at between 90 and 125 years in length, but these days can start at 999 years. And because leases countdown in length as the years pass by, quite a few older leasehold properties come up for sale with short leases. These can be problematical if you’re buying one with a mortgage.
“The banks and building societies have different rules when it comes to the minimum lease lengths,” says Aaron Strutt from Trinity Financial*, our preferred mortgage broker.
“One of the bigger lenders requires a minimum unexpired lease of 55 years at application, with at least 30 years remaining after the mortgage term finishes.”
Whether a leasehold property is one of many within a block or just a handful within a converted house, there will be a freeholder who owns the whole building including the common areas such as the hallway.
They will charge you a yearly or monthly fee to maintain and repair these common areas, usually through a management company. These service charges usually include both the ground rent (see below) and the cost of insuring the building.
Some new-build houses are sold via leases rather than as freehold ones and, as well as having more complicated service charges and ground rent, require more sophisticated mortgages.
“The lenders will typically treat the property like a flat for affordability purposes and factor in any service charges or ground rent. If they are expensive, the maximum loan size may be lowered,” says Aaron.
In most cases this is a nominal sum, reflecting how you are a ‘tenant’ paying ‘rent’ to lease your home within the building. The ground rent clauses within a lease should be checked carefully; it’s one of the areas where some unscrupulous freeholders/landlords try and make money from leaseholders.
To prepare for when expensive items within a block of flats such as the roof or a swimming pool need major works, landlords ask leaseholders to contribute regularly to a reserve or ‘sinking’ fund to cover such future expenses.
Share of the freehold
In 2004 a law was introduced that enabled leaseholders to club together, if there are enough of them, and buy the freehold off the landlord and own a share of it. This can make the properties more valuable, and enabled leaseholders to appoint their own management company or manage the buildings themselves.
A management company or agent is the organisation appointed and paid for by the freeholder to run, repair and maintain a property. The leaseholders share the cost of this via the yearly or monthly service charge (see above).
How to buy
When you buy a leasehold property, you are paying to transfer the lease into your name, and the freeholder/landlord will need to be told of the change. The original lease remains the same and includes the name/s of the first lessees, which confuses some people. But your solicitor will notify the Land Registry that you now own the lease.
*Trinity Financial has access to a wide range of banks and building societies. Their mortgage advisers will tell you exactly how much you can borrow and ensure you get the cheapest rate. Call them on 020 7267 9399 or visit: www.trinityfinancialgroup.co.uk/winkworth/
Click here to view our infographic 'What's what when buying a lease?'