Leasehold vs. freehold.
Freehold property (also called fee simple) is probably the form of ownership you’re most familiar with. In a freehold, you own the land and anything built on that land. This lasts in perpetuity, until you sell the property or pass away, basically. You can do anything you want with your property, as long as you get proper permits and approvals. If your freehold is part of a strata, such as a condo building or a bare land strata, you own your unit, but the common areas are property of the strata corporation.
In contrast, a leasehold property means that you own the house, townhouse or condo structure itself but not the land it is built on. That land is leased to you by the landowner. Leasehold land is essentially a plot of land that has been rented out to a developer, who then builds on the land and rents the property for a certain sum of money (or a portion of it in the case of an apartment building or condo).
These leases on the plots of land are typically for extended periods of time – in BC, it’s anything more than 20 years – very often prepaid up front (more on that later) and usually belong to either a city or municipality, or in many cases a corporation, a university or are First Nations’ lands. Some leaseholds are owned by private owners, too.
On REW.ca, you can find some examples of leasehold lands in BC (or add “leasehold” to any search as a keyword to see them). The land on False Creek South close to Granville Island, for example, as well as in southeast Vancouver along the Fraser River, are leaseholds owned by the City of Vancouver. Many properties near UBC and SFU are leaseholds and various corporations own much of the leasehold land in Vancouver’s West End. And the homes in Cultus Lake Town proper are 21-year leaseholds owned by the Cultus Lake Park Board.
How long can I own a leasehold property?
If you decide to buy a leasehold property, you are essentially purchasing the right to possess that property until the end of the lease, or until you sell it to someone else – whichever comes first.
If the lease expires and you are still in the home, you will have to renegotiate your terms for leasing the land your home is standing on, often at considerable expense. Or, in instances where the property was passed down from one person to another (within a family from parent to child, say) and the lease is about to expire, whoever is the current owner would have to renegotiate.
The importance of a lease agreement.
With a leasehold property it is extremely important to find out these details before you make a purchase. All leasehold land will have a lease agreement outlining details such as the terms of the lease and what happens at the end of the lease. If you own property on non-prepaid leasehold land (that is, you are making monthly lease payments), the lease agreement will also tell you whether the owner can raise your payments and, if so, at what intervals of time.
About prepaid leaseholds.
In addition to your strata fees and taxes, you may or may not be required to pay a monthly lease payment on your leasehold property. The only way to find out is by carefully reviewing the lease agreement.
A prepaid leasehold means that the developer has paid the lease payments ahead of time, so you will not have an extra bill. Although it is most likely that the owner has combined these fees into the overall value of the property itself. Non-prepaid leases, as are often found on First Nations’ lands, will likely be billed every month. On the other hand, that might also mean that a home’s overall upfront purchase price is lower.
Can I get a mortgage on a leasehold property?
There is no easy answer to this question. Generally speaking, however, leaseholds are more challenging. To begin with, most lenders will not approve a mortgage for a term or an amortization that is longer than the lease itself, which, depending on the lease’s expiration date can be problematic.
Any time a property is not a freehold there will be limits, but some lenders will be more open to the possibility. Your options will be reduced for First Nations’ leaseholds, and private leaseholds are the most challenging. In many cases for private leaseholds, the only option may be a private lender but even that is not a guarantee.
When looking for a mortgage on a leasehold property, a lender will look at everything: income, credit score, down payment and of course the property itself. Many times, leaseholds are cheaper than freeholds, so the mortgage you need will be lower, which could help you secure financing. On the other hand, you might need a higher down payment. You may consider it worth it to have a leasehold if the expiration date is far enough away in exchange for a lower upfront purchase price and the chance to live in highly desirable areas like the West End or near UBC.
But to put things into perspective, as with any home that you buy there will be lenders that’ll work with you and lenders that won’t. Contacting a mortgage broker is a good idea to determine if you can get a mortgage on a leasehold.
Keep in mind that leaseholds do not have the three day rescission period after signing a contract that freeholds do. So, work with a buyer’s agent to draft your purchase agreement in a way that covers any concerns and contingencies you may have.
Common terms you may encounter on leasehold listings.
When you’re browsing leasehold listings, you may encounter some terms repeatedly. Here’s a list of common terms and what they mean:
- Leasehold prepaid: a leasehold that has had its lease prepaid, likely as part of the purchase price.
- Leasehold non-prepaid: a leasehold that has not had its lease prepaid, meaning you have to pay rent every month.
- Leasehold prepaid strata: a prepaid leasehold strata unit, like a condo.
- Leasehold prepaid non-strata: a prepaid leasehold other than a strata.
- Leasehold non-prepaid strata: a non-prepaid leasehold strata unit, like a condo.
- Leasehold non-prepaid non-strata: a non-prepaid leasehold other than a strata.
Leaseholds offer the chance to find housing in BC that’s often cheaper than equivalent freehold properties. But there are some challenges when it comes to dealing with the lease itself and finding financing. Still, it might be worth considering a leasehold if you want to live in desirable areas without paying quite as much as you otherwise would.
The million dollar cliff: what happens if a home is $1 million or more.
In BC, a $1 million mortgage is highly likely. But what does that mean for you? A 20% down payment, the need for lots of income and other consequences. Our guide explains everything you need to know.
