Leasehold Property in New Zealand: Pros, Cons, and Essential Questions

Thousands of New Zealanders opt for leasehold properties, but it’s important to weigh the advantages and disadvantages of this type of homeownership. In this comprehensive guide, we explain what leasehold properties are, how they differ from freehold properties, and discuss the pros and cons of leasehold ownership. We also provide must-know facts and essential questions to consider before purchasing a leasehold property.

Leasehold vs. Freehold Explained When buying property in New Zealand, you’ll encounter two common terms: “freehold” and “leasehold.” Here’s a breakdown of their meanings:

• Freehold: With freehold ownership, you own both the physical property (e.g., house) and the land it stands on. This is the predominant property type in New Zealand, accounting for approximately 95% of property titles.

• Leasehold: When purchasing a leasehold property, you own the physical property but not the land it occupies. Instead, you pay rent, known as ground rent, to the freeholder who owns the land beneath your home. Leaseholds can have varying durations, ranging from a few years to several centuries. The rent charges are subject to regular reviews.

Leasehold Property – Pros and Cons in New Zealand Understanding the advantages and disadvantages of leasehold properties is crucial. Here’s an overview:

Pros:

• Affordability: Leasehold properties are often more affordable than freehold equivalents since you’re not purchasing the land.

Cons:

• Ground Rent Reviews: Ground rent is periodically reviewed (usually every 1-21 years), resulting in potential rent increases due to the appreciating value of the land.

• Mortgage Challenges: Securing a mortgage for leasehold properties can be more difficult due to the perceived risk associated with land ownership by a third party.

• Limited Value Appreciation: Unlike freehold properties, leasehold properties don’t typically experience value appreciation. Instead, there’s a risk of higher ground rent payments.

Understanding the Risks of Leasehold Properties Leasehold properties carry inherent risks that prospective buyers should be aware of:

• Ground Rent Reviews: Ground rent is subject to review every 7-21 years, often leading to increased costs for leaseholders as land prices continue to rise.

• Resale Risk: Mortgage approval for leasehold properties can be challenging due to potential difficulties in selling the property and uncertainty regarding future ground rent reviews.

• Freeholder Practices: Some freeholders, such as religious organizations, have a history of selling the land to leaseholders. However, this is not guaranteed, making leasehold investments riskier than freehold properties.

Essential Questions to Ask Before Purchasing a Leasehold Property Before making an offer on a leasehold property, ensure you have the necessary information by asking these crucial questions:

1. When are the ground rent reviews scheduled? Frequent reviews increase the likelihood of rising costs.

2. How is the land’s value determined? Understanding whether it’s classified as bare land or developed land helps estimate the ground rent.

3. Who is the freeholder, and what is their reputation? Research the freeholder’s reputation regarding rent increases, fair treatment of leaseholders, and legal disputes.

4. Can the freehold be purchased, and if so, when? Buying the freehold can convert the leasehold property into a freehold, reducing risks and increasing its value.

5. Are there any usage restrictions for leaseholders? Determine what renovations, extensions, or alterations are allowed within the property.

6. What is the price history of the property or similar properties in the development? Understanding the property’s market value helps assess its competitiveness and potential risks.

Owning a leasehold property in New Zealand can offer affordability but comes with risks and considerations. By understanding the pros and cons, as well as asking essential questions, you can make an informed decision when considering a leasehold property purchase.

Your Outside Team