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Leasehold v freehold for second property

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nightowl1970
nightowl1970 Posts: 16 Forumite
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in House buying, renting & selling
I own my own house outright and have about £150k in my previous employer's pension scheme. I'm obviously thinking of consulting a financial expert before making any decisions but I have been toying with the idea of whether investing that money in a second property might be a good idea.

I've recently been looking at properties in a city I visit quite often for leisure purposes. I could buy a leasehold flat in a popular area of the city outright or a freehold house in a less desirable location. If I wanted to buy a freehold in a popular area I'd probably have to take out a mortgage of around £90k. The purpose would be to rent the property out in the short term and then either sell it or use it myself in the long term.

I'm naturally inclined towards freeholds because obviously you own the property yourself forever but the thought of another mortgage isn't a great feeling. I've never really considered leaseholds before because of the obvious word 'lease' and also things like service charges etc. Can anyone tell me why they might be a good option? Also is there a minimum lease period that's probably not worth dropping below?

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  • hazyjo
    hazyjo Posts: 15,470 Forumite
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    How old are you? 55+? If so, does that mean you'll be taxed on at least 75%? (I am not a pensions expert so my knowledge is sketchy at best!)

    Plus 3% stamp duty.

    Plus associated fees (letting agents, etc).

    What makes you think property will perform better than your pension? In some parts of the country, prices still haven't recovered from 2008-ish.

    I would be more inclined to look at supply and demand. Pointless buying a flat if the market's swamped, and again pointless buying a house if people in that area want flats. If I ever bought a leasehold property, I'd want at least 85 years on the lease. Any more, I'd look to them to extend. Personally, I'd not let it drop below 80.
    2023 wins: *must start comping again!*
  • eddddy
    eddddy Posts: 16,506 Forumite
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    nightowl1970 wrote: »
    I own my own house outright and have about £150k in my previous employer's pension scheme. I'm obviously thinking of consulting a financial expert before making any decisions but I have been toying with the idea of whether investing that money in a second property might be a good idea.

    As Hazyjo suggests, you'd be putting all your eggs in one basket.

    i.e. A big chunk of (or perhaps all of) your pension pot in one property.

    If the property market dives - or if the specific property you choose dives (e.g. because something happens in the area) - your pension could be hit hard.

    I would imagine that your £150k is currently in a diversified group of investments - so it's lower risk.


    (Also, I very much doubt that a financial advisor would give advice on property investment.)
  • AnotherJoe
    AnotherJoe Posts: 19,622 Forumite
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    How exactly are you planning to access that £150k to use it to buy a property?
  • macman
    macman Posts: 53,098 Forumite
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    Take the full amount out in one tax year and you will get an immediate income tax liability of c. £36K. As pointed out above, you can only take out 25% tax free. So nearly a quarter of your pension pot will disappear in one hit. Not very clever.
    No free lunch, and no free laptop ;)
  • AnotherJoe
    AnotherJoe Posts: 19,622 Forumite
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    macman wrote: »
    Take the full amount out in one tax year and you will get an immediate income tax liability of c. £36K. As pointed out above, you can only take out 25% tax free. So nearly a quarter of your pension pot will disappear in one hit. Not very clever.


    At least. If the OP is still in employment, it will be more, up to double that.


    Even if the property was very profitable, more than the funds its currently in (which is very unlikely) , it would need to be massively more so to overhaul the initial losses of income tax, SDLT, purchase and start up fees plus ongoing management expense. More than is feasible.
    And aside that, orders of magnitude more risky.
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