Situated in some of the most affluent neighbourhoods in the City, a condo, townhome or even a detached property awaits your purchase for a significantly lower price than that a similar home in the same area. In the West End, False Creek, Kitsilano, Fairview Slopes and Point Grey in Vancouver and popular South Arm and Brighouse in Richmond, this option is frequently available for the house hunter. Does that sound too good to be true? Depends who you ask.
A renter who is looking to get into the real estate game but can’t afford a freehold property in their desire area may find buying a leasehold home a great compromise, enabling them to keep payments low without having to downgrade their location. After all, a lease is just another term for renting, right? As in a leasehold property? Yes.
So how does it work? In Canada, land administration is generally divided into two categories: fee simple (freehold) land and leasehold land.
Freehold land is held by the majority of residential purchasers. This type of land is owned by the registered owner including all the properties rights that are associated with the lands. There can be restrictions on the title for instance a restrictive covenant, easement, statutory right of way or a building scheme but the owner owns the land and the restrictions that come with it.
Leasehold land is land in which the rights to the land are limited since it is leased to the purchaser by another party: “the landlord” The “landlord” is usually the federal government, the City where the land is located or a First Nations band. Long-term leases can be up to 99 years. Within the lease specifications, the “tenant” owns the right to use the property for a specified amount of time. Within this time frame, the owner/tenant can resell the property and profit from market appreciation. Although leasehold land tends to appreciate on a smaller scale in comparison to freehold land, it does appreciate with the market.
The total purchase price of leasehold land is considerably lower than a freehold purchase, as the land is not yours. As such monthly payments will be lower than those on a similar freehold property, based on mortgage amount.
How much cheaper? For example, a search on REW.ca in July 2015 showed a three-bed, 1325-square-foot leasehold townhome in Vancouver’s Champlain Heights (see neighbourhoods, below) listed for $379,000 – much cheaper than the 1,300-square-foot three-bed freehold townhouse listed for $505,000, just a few streets away.
However, do keep in mind that leasehold payments are required on top of monthly mortgage payments if the payments have not been pre-paid.
When buying a leasehold strata, the strata fees are also not included in the additional leasehold payments and would have to be paid to the strata separately. Of course, that's true for freehold strata homes too.
It's also important to remember that when making a residential real estate purchase, you are investing in a depreciating asset – the building – and in an appreciating asset – the land. Where land is leased you are not maximizing market appreciation.
Although mortgage lenders vary with guidelines and financing options, most tend to require a minimum of 30 per cent down on a leasehold property, although a few will consider a lower down payment.
Another key component in financing is the duration of the time remaining on a lease at the time of the mortgage application. A lease with 15 years or less remaining may be a deal breaker for some mortgage suppliers as the amount of the lease payments can drastically increase when the lease comes up for renewal putting the mortgage applicant in danger of keeping up with their monthly payments especially if their mortgage is amortized over 25 years. Also, the marketability of a lease coming up for renewal relatively quick is diminished significantly in terms of attractiveness to potential buyers as future terms and interest rates are unknown.
As with any financial or life endeavour, education is key. The way to change that is to research and gain knowledge so that you can be aware of the possible complications and hiccups that can arise. Educate yourself regarding renewal procedures, terms, interest rates, resale value and consult legal advice before moving forward if purchasing leasehold land has presented itself as an option.
So where can you find these leasehold gems? Start by doing a search on REW.ca in your preferred neighbourhood, then filter the results with the keyword “leasehold.” Here are a few areas to get you started.