Leasehold vs Freehold properties. Whats the Difference?

We will explore leasehold and freehold ownership in British Columbia, the risks involved with purchasing a leasehold property, and the advantages and disadvantages of leasehold versus freehold properties.

FREEHOLD

With a freehold property, you own both the property and the right to stay in it indefinitely, as long as you make timely payments to your lender. You are listed as a "freeholder" in the land title office, which gives you "title absolute."

If you can afford a freehold property, it is generally the preferred option. You won't have to pay annual ground rent, worry about your landlord not maintaining the building, or pay large sums of money for repairs.

A common example of a freehold property is a detached home. You own the property and the land it sits on, and you are solely responsible for maintaining the house.

LEASEHOLD

In a leasehold situation, you own the structure and buildings on the land, but you lease the land itself from the owner. The land may be owned by the city, federal government, First Nations lands, universities, or private individuals. The owner of the land is referred to as the "freeholder" or "landlord," and the leaseholder has a contract with the freeholder that outlines the length of the lease and the legal rights and responsibilities of each party.

Leasehold properties are prevalent in Vancouver's False Creek area, the University of British Columbia, and Simon Fraser University in Burnaby. The leases typically last between 50 and 99 years, and developers build and improve the properties before selling or renting them out.

In essence, buying a leasehold property gives you the "right of exclusive possession" until the lease expires or until you sell that right to someone else. You own the property, but not the land it's on.

Leasehold versus freehold properties

While leasehold properties can offer a better lifestyle at the same price, they often don't appreciate in value as much as freehold properties because you don't technically own the land. They're typically less expensive, which means you may be able to afford a larger, fully-renovated property.

Lease payments may not be prepaid, meaning you may have to pay annual lease payments that increase periodically, along with your strata fees, taxes, and mortgage payments. If the lease has been prepaid, it will be incorporated into the purchase price.

If your lease is almost up, you won't know if it will be renewed or how much it will cost. You should look for a property with a long lease to avoid this issue.

Lenders use the expiry date of the lease as a guideline for loan amortization periods, meaning you may not get a long-term mortgage.

Some banks may have specific requirements for leasehold properties, such as requesting a larger down payment or not qualifying for reverse mortgages. This can make it harder to sell and less valuable than a freehold property.

Consider the length of the lease and how it affects your budget and property value. A 99-year lease is the safest option.