I was reading an article on leasehold properties the other day and thought it had a pretty skewed perspective—until I realized it was a sponsored piece made to look like journalism. Argh! I can’t stand all the deception in the media these days. So, to counter the misinformation being circulated, here’s my take on leasehold properties.
In short: if you have the option, buying a freehold property is almost always the smarter choice. But leasehold can make sense in select situations.
For example, I once met a gentleman who had gone through a divorce and needed a stable home to raise his child. He wanted an environment where monthly payments were fixed and there was no risk of eviction until his child finished school. The only property that met his needs—and that he could qualify for—was a leasehold. His mortgage payment was also lower than the rent he would have been paying. In his case, it made perfect sense. It might be the right choice for you too—but make sure you understand what you are getting into.
When you buy a freehold property, you own both the house and the land it sits on—forever. When you buy a leasehold, you own the house or condo, but not the land. The land is leased from the owner, making it more like a long and complicated rental arrangement.
When the lease is still long—say 99 or 75 years—you might see some appreciation in value. But by the time there are about 50 years left, don’t expect the property to hold its value. Banks know the ownership is time-limited. Once there are 25 years or less remaining, financing becomes very difficult, if not impossible. That dramatically shrinks your pool of potential buyers—and your property value will drop accordingly.
When the lease expires, you (or the strata) will have to renegotiate with the landowner—if they even want to renew. Conventional advice is to ensure there’s an option to renew in the lease agreement, but here’s what most people don’t consider: even if renewal is possible, the terms may be unaffordable. Think about how much time has passed since the start of the lease and how much land values have risen. Even a “fair” market rate could mean a massive increase in ground rent and renewal fees. And if the landowner can make more money selling or redeveloping, why would they offer you favourable terms? At the end of the lease, you should expect to get little or nothing back—even if your mortgage is paid off.
I have a friend who says they’re not worried because they don’t plan to move and have no children to inherit anything. I’d argue that’s short-sighted. As you get older, you might find that a three-storey townhouse is risky to navigate and that single-level living would be more practical. If your property had appreciated with the market, you could sell it and trade up—or trade down—to something better suited to your needs. You could also sell it to help fund a retirement home or cover medical expenses.
So, unlike what the ad/article claimed, leasehold is not a savvy way to “get into the market,” and no, the property will not appreciate like a freehold. Buyers, beware. Below is a rough guide as to how the professionals think about the value of a leasehold.
