Buying a home is a big financial investment, so you’ll want to get familiar with the property you’re considering buying before taking the plunge. Among other things, you should find out whether the home you’re looking at buying is a leasehold vs. a freehold property, as this will determine your ownership rights.
Let’s go into more detail about leasehold vs. freehold properties, along with the pros and cons of each.
Freehold vs. Leasehold
In the world of real estate, you’ll be more likely to come across freehold properties than leasehold. Let’s take a closer look at the difference between the two.
What Are Freehold Properties?
A freehold property is one that you fully own, including both the property and the land. Freehold ownership is the most common way to own a home in Canada. Single-family homes — particularly detached homes — are most often classified as freehold properties.
As the owner, you are not held by any other entity. This gives you the freedom and flexibility to use both the building and land however you please. As long as its use is considered legal under local bylaws.
What Are Leasehold Properties?
With a leasehold property, you own the structure but not the land. The owner of such land is usually the government or a First Nations group.
With this arrangement, you lease the land from the owner for a certain amount of time, usually 99 years. Though lease terms can range anywhere from 40 to 999 years. You’re responsible for paying any additional service charges or maintenance fees.
Once the lease ends, you’ll need to renegotiate land fees with the owner. However, there is a risk that the landlord may either renew the lease at a much higher price or choose not to renew at all.
Differences Between Leasehold vs. Freehold
There are several significant differences between freehold and leasehold properties that you should understand before purchasing real estate. These differences can impact your investment and your freedom to use your home as you please.
1. Differences Between Leasehold vs. Freehold: Control Over Property
Freehold. With a freehold property, you’re the sole owner. That gives you complete control over both the building and the land. You can renovate, make changes to the home, and add any structures on the land.
Leasehold. There are several restrictions involved with leasehold properties. More specifically, you will have to follow the owner’s rules. For example, making structural changes to the home, adding structures to the land, or having pets.
2. Differences Between Leasehold vs. Freehold: Property Depreciation And Appreciation
Freehold. Freehold properties may be more expensive than leasehold. But, they also appreciate in value over time, giving owners the benefit of accrued equity. In exchange for the freedom of ownership and increase in value. You’ll be paying much more for a freehold property.
Leasehold. Unlike freehold homes, leasehold properties do not increase in value in the same way. In fact, leasehold properties can decrease in value each year as the lease term dwindles.
3. Differences Between Leasehold vs. Freehold: Impact On Insurance
Freehold. You’re required to buy an insurance policy that covers both your home and the land. As such, insurance premiums for freehold are higher than leasehold.
Leasehold. Since you only own the building in a leasehold agreement, you’re only required to buy insurance for the home, and not the land. Instead, the landlord will insure the land. As such, your policy may not be as expensive.
Advantages Of Freehold Properties
Freehold properties come with a variety of benefits, including the following:
- Total freedom. As the owner of a freehold property, you have complete control over your home and the land it sits on. You don’t need to get permission from anyone to make changes to your home or land. As long as you’re in compliance with local regulations.
- No ongoing fees. Aside from paying a mortgage, there are no maintenance fees to pay to another entity, such as a landlord or condo corporation.
- Greater appreciation in value. Freehold properties appreciate in value much more than leasehold properties. That’s because you also own the land, which is what brings in greater appreciation.
- Easier to secure a mortgage. Lenders are more willing to extend mortgages to finance freehold properties than leasehold properties. As such, you’ll find getting a home loan at a lower rate easier.
Disadvantages Of Freehold Properties
Along with the perks of freehold properties come some drawbacks, such as the following:
- Higher upfront costs. Since you’re purchasing both the building and the land, you’ll pay a lot more for a freehold property.
Advantages Of Leasehold Properties
Leasehold ownership has some advantages, such as:
- Lower upfront costs. Leasehold properties are significantly cheaper than freehold homes. That’s because you only buy the building, not the land.
- Less maintenance. The land owner is responsible for maintenance, so you don’t have to spend any time maintaining the property yourself.
Disadvantages Of Leasehold Properties
There are a few disadvantages of leasehold properties that should be considered, such as the following:
- More difficult to sell. Leasehold properties are not as highly favoured as freehold homes. If you own a leasehold property and are looking to sell, you might have a harder time finding a buyer.
- Potential for disputes. Leasehold landlords often charge high maintenance fees, which can be a source of contention between you and your landlord.
- Risk of lease not being renewed. Leasehold landlords don’t have to renew your lease when it ends. Instead, they can choose to buy you out, leaving you in a position to have to move out and find a new home.
Types Of Freehold Ownership
There are a few types of freehold ownership, which differ in terms of conditions that may or may not be imposed on owners.
Fee Simple Absolute
With this arrangement, owners have total control of the building and the land. As an owner, you have the freedom to use the property any way you like, within the scope of local laws. There is no set length of ownership, and you’re free to transfer the property whenever you want.
Fee Simple Determinable
With this type of ownership, the use of the land is subject to specific provisions. If you breach any of the conditions stipulated in your contract, the previous owner can repossess the property.
As a life tenant, you will own the property for as long as you live. Once you die, you lose all rights to the property.
Types Of Leasehold Ownership
There are a handful of leasehold agreements, most of which allow you to rent the land for a specific period of time.
Estate For Years
Most leasehold agreements are considered an estate for years, which allows you to live on the property between two specified dates. During this time, you must pay rent and adhere to the conditions of the lease contract. At the end of the agreement, you must vacate the premises, unless the landlord renews the contract.
Estate From Year To Year
This type of leasehold ownership is a form of periodic tenancy. In this case, the tenancy automatically renews every year until it is terminated by either you or the landlord.
Tenancy At Will
This type of leasehold ownership does not involve a formal contract between you and the landlord. With no fixed-term contract, you or your landlord can terminate the tenancy at any time.
Tenancy At Sufferance
If your lease has expired and you have not vacated the premises per your contract’s conditions, you’re considered to be in a tenancy at sufferance. At this point, you don’t have permission to stay on the property, and the landlord could sue you as a result.
Final Thoughts On Leasehold vs Freehold Properties
Freehold properties are much more expensive than leasehold homes, but you’ll have more flexibility and a more valuable investment. Before you get into the real estate game, be sure to weigh the perks and drawbacks of each type of ownership and determine which one is best suited for you.