Freehold versus leasehold: the cheaper home that may not stay cheap

The cheaper listing

Sophie and Mark see two similar homes. The freehold home costs more, but the land comes with it. The leasehold home looks like the bargain: the mortgage would be smaller and the current ground rent looks manageable.

They ask their mortgage broker to compare the two. The broker says the leasehold payment is not just another small household bill. It is a long-term obligation that can change at the review date, affect the resale value, and make the property harder to finance or sell.

The broker’s warning

“Do not compare the mortgage payments only,” the broker tells them. “Show me the ground rent today, the next review date, the review formula, the remaining lease term, and what happens if the rent doubles. Then show me whether you could still carry it if the home became difficult to sell.”

The broker also checks whether the lender will accept that type of lease, whether the valuation reflects the ground-rent risk, whether insurance is available, and whether the buyer could refinance later. A cheap leasehold property is not automatically a cheap home.

How the cheap option can turn bad

Imagine the current ground rent is affordable when Sophie and Mark buy. They organise their budget around it. Years later, the lease reaches its review date. The new rent is based on a higher land value, not on what their wages have done. Their payment rises sharply while the mortgage is still there, rates still arrive, and the house still needs maintenance.

They try to sell, but buyers see the next review and lenders see a property with a difficult exit. The asking price falls. If the value falls far enough, the money they put into the property can disappear without the ground rent problem disappearing with it.

This is not the normal outcome of every leasehold purchase. It is the risk the buyer must test before signing, because the lease—not the agent’s description of today’s affordability—controls the future rent.

Auckland examples worth knowing

These are reported cases, not predictions for every leasehold property:

• In Epsom, reporting described a house where annual ground rent rose from about $8,300 to $73,750 after a review; the owner abandoned the property. NZ Herald: leasehold land deal and Epsom case →
• RNZ reported another Auckland leasehold owner who abandoned a home after the ground rent moved from $250 a month to an expected $1,000 a week, while the owner was still dealing with mortgage consequences. RNZ: man still paying mortgage on abandoned leasehold home →
• RNZ also reported that some Auckland apartment leases were approaching review, with one Scene 3 apartment’s ground rent reported at $24,780 a year and concern that a future review could double it. RNZ: Auckland apartment ground-rent review →

These cases explain why a leasehold property can be cheap to buy and expensive to own, refinance, or sell. They do not prove what any particular lease will do.

Questions before making an offer

• Who owns the land, and who is the lessor?
• What is the current ground rent and how is it paid?
• When is the next review, and is it based on market land value, a formula, or another method?
• How often do reviews occur—seven years, 21 years, or another interval?
• What is the remaining term, and what are the renewal or expiry consequences?
• Will the lender, valuer, insurer, and future buyers accept the lease on reasonable terms?
• What happens if the ground rent doubles or the property value falls?

The simple lesson

Freehold can look expensive because more of the land value is in the purchase price. Leasehold can look cheap because the land cost is pushed into an ongoing rent. Before choosing the cheaper listing, Sophie and Mark need to know whether they are buying a home—or buying a future rent review they may not be able to escape.