Homeownership Types

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TPFG

3 weeks ago - 19-11-2018

Buying a property isn't simply a case of finding a home and purchasing it. There are several different types of homeownership and each one comes with its own set of pros and cons.

Ellis & Co's comprehensive guide can help when trying to work out which is best for you.

The different kinds of homeownership are:

1. Freehold

2. Leasehold

3. Shared ownership

4. Fractional ownership


WHAT IS FREEHOLD OWNERSHIP?

If you own the freehold of a property, you own the building and the land the property sits on completely outright. Most houses are freehold ownership and your name would appear on the land registry as 'freeholder'.


THE PROS OF FREEHOLD OWNERSHIP

The positives of freehold ownership are clear. It is the least complicated type of homeownership and, legally, it is the least likely to attract some kind of dispute. Some other key positives of freehold ownership include:

* No annual ground rent is payable

* No reliance on another freeholder maintaining the building

* You can do what you like with the property within the restrictions of law and local authority

* You have a long-term investment

* There are no worries about a lease running out



CONS OF FREEHOLD OWNERSHIP

Before buying a freehold property, you should also consider the following:

* You are solely responsible for the function and maintenance of the property and the land it sits on

* You must be a responsible homeowner and this will be judged by the local council and the community.

* Buying a freehold property can be more expensive that buying a leasehold home



LEASEHOLD MEANING

Many potential homeowners are unsure what leasehold means.

Leasehold means you are living in a property, even if you 'own' it, under the terms of a lease from the freeholder. We've placed the word 'own' in quote marks for a reason, too.

While you can buy and sell a leasehold property, such as a flat, of which most are leasehold, you technically own the lease rather than the property itself. The land the property sits on also belongs to the freeholder.

The length of the lease can vary. Some leases are as long as 999 years, while others could be as little as 40 years. This is the length of time you can live in the property before the lease transfers back to the freeholder.

For those considering buying a leasehold property, a lease of less than 80 years should be a cause for concern. Not only does it lower the value of a property, but some mortgage companies will be reluctant to lend on such a short lease.



ADVANTAGES OF LEASEHOLD PROPERTIES

There are several advantages of leasehold properties over freehold homes:

* You are not responsible for the upkeep of communal areas at the property. The responsibility of these areas and the external structure of the building (for example a block of apartments) lies with the freeholder

* If you are having issues with neighbours (i.e noise or smell), this should be dealt with by the freeholder rather than you

* Buildings insurance is usually arranged by the freeholder



DISADVANTAGES OF BUYING LEASEHOLD PROPERTY

As a leasehold property owner, you will:

* Have to pay ground rent and a share of maintenance charges to cover the upkeep of the entire property

* Have to get the freeholder's permission to make certain changes to the property, such as extensions

* Potentially need the freeholder's permission to have a pet in the property

* Be responsible for the upkeep and maintenance of the inside of your property



BUYING THE FREEHOLD OF A LEASEHOLD PROPERTY

Most flats and apartments are leasehold properties. In the case of a block of apartments, the building is owned by the freeholder - usually the builder or developer responsible for building the block in the first place.

While apartment owners can't buy the freehold for their individual property, it is possible to buy a share of the building's freehold.

Many converted houses hosting, for example, six individual flats, are owned on a shared freehold basis.



ADVANTAGES OF BUYING A SHARE OF A FREEHOLD

* Ends concern of an expiring lease as leaseholders owning a share of a freehold can extend it

* Allows more control over repairs, renovations and maintenance to the building

* The leaseholders can agree to pay minimum ground rent and set their own maintenance charge



DISADVANTAGES OF BUYING A SHARE OF FREEHOLD

* More responsibility for building and land maintenance

* Increased administration as leaseholders would be responsible for collecting building maintenance charge each month



HOW DOES SHARED OWNERSHIP WORK?

When it comes to shared ownership properties, we're talking a vastly more complex form of homeownership.

In simple terms, though, shared ownership is a process whereby the homeowner buys a percentage of the property and pays rent on the rest.

With many first-time buyers priced out of a growing property market over the past decade, shared ownership has provided many with an opportunity to get on the property ladder.

Most properties available to buy under shared ownership schemes are new builds and they are only available to buy on a leasehold basis. The buyer must purchase between a quarter and three quarters of the property and pay rent on the remaining amount.

In order to buy a shared ownership property, you must:

* Be a first-time buyer

* Be previous homeowner who can no longer afford to buy

* Have a permanent right to live in the UK

* Have a combined household income of less than £80,000 (£90,000 in London)

Shared ownership has grown significantly in London where property prices remain out of reach for many first-timers, despite a variety of properties for sale.


SHARED OWNERSHIP POSITIVES

* The biggest plus point about shared ownership is costs. The process allows those without a huge deposit to technically 'own' a home and reap the benefits that come with that, such as capital growth.

* The rent side of shared ownership is often a lot less than a private rented property

* You have added security of tenure compared with a private rented home



SHARED OWNERSHIP NEGATIVES

* The property is owned on a leasehold basis, so usually there is a maintenance charge on the property

* As you don't own 100% of the property, you are treated as a tenant by law. That means, despite owning a percentage of the property, you could be evicted if you fail to pay the rental side of the agreement in full and on time

* Not all mortgage lenders offer shared ownership loans



WHAT IF I WANT TO BUY MORE OF THE PROPERTY LATER?

This is known as 'staircasing'. Those who own a shared ownership property should contact their housing association if they wish to purchase a larger percentage of their home.

Before 'staircasing', the property must be valued by a chartered surveyor and the owner must establish where the additional funds are coming from. The money could come from:

* Savings

* Additional borrowing on existing mortgage (subject to lender)

* A remortgage



SELLING A SHARED OWNERSHIP PROPERTY

As with purchasing more of the property, the housing association must be contacted before a shared ownership property can be sold.

They may nominate a buyer if they have a waiting list for shared ownership homes, while some associations may have a right to try to sell the property for you for eight weeks. If the property remains unsold after that period, the owner can sell their share on the open market.

Some housing associations offer 'back-to-back staircasing'. This is where a new buyer purchases both the seller's share and housing association's share when purchasing the property.



FRACTIONAL OWNERSHIP

Properties for sale under fractional ownership are generally homes abroad, particularly in the Caribbean and United States of America.

Fractional ownership usually involves a group of people each buying a share in a holiday home and, in return, receiving a set number of weeks to use that property each year.

There is a popular misconception that fractional ownership is simply timeshare. But unlike timeshare, fractional ownership does see the buyer purchase a share in the actual property itself, meaning they benefit from the property’s capital growth or suffer from its depreciation just like owning a property in the UK.

There are a host of fractional ownership forms, including:

* Basic fractional ownership

* Private residence club

* Destination clubs

* Exchange programmes

All these forms work in different ways, with destination clubs being more like hotel resorts, private residence clubs forming the top end of the fractional ownership market and exchange programmes seeing owners swap their time at their properties for time at others somewhere else in the world.



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