What's the point of buying a Leasehold property?

Entsolen

I know that this must have been discussed a lot. And I have attempted to do my own research on this. But I'm still not getting it, so I ask you to please be patient with me and explain what I may be missing in my understanding.

To me, the main advantage of getting a mortgage over renting, is that a lot of the money you put into the property through the mortgage payments is "retained", as in, it gives you more and more ownership of the property and if you wish, you can sell it and get a lot of that money back, where's with renting the money is just gone.

However, when you buy a Leasehold property, the lease starts running out. Doesn't that mean that every year you're actually loosing value on your property, and therefore a bigger part of the money is gone, just like with renting? Plus you need to pay fees to the freeholder, plus there may be certain crappy rules, like no pets, plus the freeholder might go broke or do something dodgy.

As I understand you have a right by law to extend the lease, but again, that's extra money and headache that you need to throw at the property somewhere down the line. 

Where's with a freehold once you buy it you fully own it, so you are not bound to any rules set by the freeholder, and you don't incur any depreciation due to the lease running out. 

So it seems like financially it's a much better decision to buy freehold, as a substantially bigger part of the money that you pay for the mortgage is retained in your ownership of the property, where's with a leasehold it almost feels like you're renting for a very long time.

Am I missing something? Is extending the lease not as expensive or painful as I imagine? Is the value lost due to the lease running out quite negligible?

The reason I'm asking is because I am looking to become a first time buyer in London, and obviously with Leaseholds I have a lot more options in terms of choice of properties as well as the Help to Buy scheme.

But it almost feels like I'll be throwing more money down the drain if I go with Leasehold, and it would make more sense financially to hold out a little and get a freehold instead.

user1977

Leases are typically for hundreds of years - what do you think is the difference in value between a 175 year lease and a 174 year lease? Any depreciation is going to be outweighed by the (general) increase in property prices. It only starts to really matter once the remaining term is much shorter.

You're mistaken (though quite a common misconception) in thinking that there are no "rules" with freehold properties too, they're really just as likely to have the same sort of restrictions.

Entsolen

user1977 said:

Leases are typically for hundreds of years - what do you think is the difference in value between a 175 year lease and a 174 year lease? Any depreciation is going to be outweighed by the (general) increase in property prices. It only starts to really matter once the remaining term is much shorter.

You're mistaken (though quite a common misconception) in thinking that there are no "rules" with freehold properties too, they're really just as likely to have the same sort of restrictions.

But I imagine something like 90 and 60 years or even 90 and 80 years will have a substantial difference in value. Plus I can't help but think about my descendants that may run into lease issues in the future.

SavingPennies_2

Many leaseholds are 999 years, issues caused by the leasehold running only apply on short leases <80 years. Many leasehold houses are virtually the same as freehold in practice, but obviously something to check on each individual basis.

user1977

Entsolen said:

user1977 said:

Leases are typically for hundreds of years - what do you think is the difference in value between a 175 year lease and a 174 year lease? Any depreciation is going to be outweighed by the (general) increase in property prices. It only starts to really matter once the remaining term is much shorter.

You're mistaken (though quite a common misconception) in thinking that there are no "rules" with freehold properties too, they're really just as likely to have the same sort of restrictions.

But I imagine something like 90 and 60 years or even 90 and 80 years will have a substantial difference in value. Plus I can't help but think about my descendants that may run into lease issues in the future.

Yes, it becomes more significant once you look at shorter term leases. But that should be taken account of in the price - a 60 year lease should be significantly cheaper than a freehold title of the same property. Whereas, say, a 999 year lease is nearasdamnit freehold.

housebuyer143

I suppose the benefits to leasehold are with flats, where you share communal areas and otherwise may struggle to get all parties to repair things that are needed in the block. 

I imagine with houses there is no benefit to leasehold. 

Woolsery

There are leashold propereties with incredibly low ground rents. My first house had the remainder of a 999 year lease and a ground rent of £5 per annum, which no one bothered to collect.

user1977

housebuyer143 said:

I suppose the benefits to leasehold are with flats, where you share communal areas and otherwise may struggle to get all parties to repair things that are needed in the block. 

The solution doesn't need to be leasehold, that's just the rather clunky way it's been done in England & Wales (because the law doesn't cope very well with freehold titles stacked on top of each other).

eddddy

Entsolen said:

Plus you need to pay fees to the freeholder, plus there may be certain crappy rules, like no pets, plus the freeholder might go broke or do something dodgy.

I'm not necessarily disagreeing with everything you say, but just for perspective...

You're living in a shared building, isn't it a good thing that there are rules to make life pleasant for everyone, including you? For example:

• It's good that your neighbours aren't allowed to have dogs that bark, howl and yelp all night, keeping you awake

• It's good that your upstairs neighbour has to put carpet on the floor, so you don't hear them stomping about

• It's good that your neighbour downstairs can't just knock down a wall, causing your floor to collapse

Also, if you owned a freehold house, and the roof needs repairing, you'd have to pay to repair it.

So if six people own flats in a building, and the roof needs repairing, the freeholder does the repair, and charges 1/6th of the cost to each flat owner. That's not too unreasonable.

Ath_Wat

There are no real advantages to a leasehold house (as opposed to flat) but if you find the ideal house and the only problem you can foresee is that in 900 years your descendants may have to pay out a few quid to extend the lease, are you going to say no and look for something else?

Slithery

If I was looking to purchase at the minute I'd happily go for a cheaper property with a 50 year lease over a more expensive one with 100+ years left.

I have no dependants and won't be around in 50 years so why would I waste the money?