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Leaseholds – some things to consider.

Key points at a glance

Leaseholds are associated with challenges from a financing perspective as, in most cases, the usual financing guidelines do not apply. Instead, borrowers have to put up more of their own funds, and ground rent is factored in when calculating affordability.

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Features of leaseholds.

With leaseholds, the owner of the land gives another person the right to build on their land. A ground rent is usually requested for this. Leaseholds require official certification, and a corresponding entry, as a separate plot, is made in the land register in most cases. Leaseholds are set up for a maximum of 100 years, although the term may be extended on expiry. The advantage of recording an entry in the land register is that the leasehold or the building (house) is now associated with a charge and can therefore be considered for the purposes of financing a mortgage.

Pitfalls of leaseholds.

When you buy a house under a leasehold arrangement, you enjoy the advantage of acquiring a house without having to buy the associated land as well. So you can get your dream property for a smaller capital outlay. But leaseholds are a complex legal construct. Before making a decision, you should carefully study the leasehold contract and consider the following two points in particular:

Ground rent

You will be paying ground rent in order to “rent” the land. There are no statutory provisions on how this should be calculated. Often, calculation of the amount concerned is informed by changes in consumer prices, but other arrangements are possible.

Ground rent

Reversion

When the leasehold term expires, the parties are free to extend the contract by up to another 100 years. If an extension is not being considered, the house becomes the property of the freeholder once more, a process referred to as reversion. The person granting the leasehold (i.e. the freeholder) is in fact obliged to pay a suitable amount of compensation. However, it makes more sense to set the relevant rules for any reversion scenario in the leasehold contract.

Reversion

Conclusion

You are certainly able to take out a mortgage on a house under a leasehold arrangement. But this is associated with various restrictions, imposed by the finance provider, as the value of the property is difficult to calculate. After all, the residual term of the leasehold contract, the designated compensation in the event of reversion on expiry of the contract and also reduced demand, making the property harder to sell on, can all bring down the house’s market value.

So seek advice from a notary and an independent mortgage expert if you are considering buying a house under a leasehold arrangement. This will protect you against any nasty surprises and, ideally, allow you to enjoy your home for decades to come.

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The current most attractive mortgage interest rates.

Saron mortgage from*

0.65%

Fixed-rate 10 years from

1.25%

Fixed-rate 5 years from

0.87%

* The value shown here for a SARON mortgage is made up of the current SARON (Swiss Average Rate Overnight) and the individual margin of the mortgage lender. Generally speaking, the interest rates shown are the best conditions currently available. Your personal interest rate may differ based on the loan-to-value ratio, affordability, mortgage volume and location of the property.