If you are about to buy your first home, one of the first things to do or pay attention to is to take into account the category of the property either leasehold or freehold. What is the difference between freehold and leasehold? This article will help you understand more differences between these two and other things related to these two types of real estate to help you make choices in getting the best property.
Common Misunderstandings About Leasehold vs Freehold
In general, many of the home buyers are still confused and have lack of knowledge about leasehold and freehold real estate. Here are some common misunderstandings among buyers related to Leasehold vs Freehold for your reference and guidance:
1. Need to Move Upon Expiry of the Lease Period
One of the significant differences between freehold vs leasehold properties is that the lease period-the lease term for leasehold property is 99 years while the holding period for freehold property is forever (permanent holding). As a result, many of Leasehold property owners think their homes or homes will be taken over by the government after the expiry of the lease.
Usually, the government will not take back the property and the owner may apply to extend the lease period at their respective State Land Offices and it is subject to certain premium rates. Each state sets out how to calculate different premium payments.
However, regardless of whether your land is a freehold or leasehold, the government can use the power to take over your property under the Land Acquisition Act 1960 and you will usually receive compensation for the property. Usually, the government decides to take over the area for public interest such as highway construction and so on,
2. Leasehold House Is Hard to Sell or Transferred
The leasehold status of the leasehold property you want to sell must obtain permission from the State Authority. This is in contrast to the freehold of freehold status and is not subject to the authority of the State Authority. However, some cases of freehold status should be obtained first before selling real estate due to certain factors such as restrictions of interest.
3. 99 Years of Lease Period
The technical lease expiration date does not calculate when you buy the house or real estate. However, it is usually calculated based on the information that is usually stated on the front page of the right letter. For example, if you buy a home in 2000, it does not mean that the lease period expires in 2099. However, you need to refer to the front page of the right letter to find out or obtain the correct expiry date.
The expiry date of the lease is very important as it can be a decisive factor in the approval of your home loan. This is because the bank will take into account the remaining lease balance and the loan application is likely to be rejected if the lease balance is less than 40 years.
The Difference of Freehold and Leasehold You Need to Know
Freehold vs leasehold as stated above refers to the status of property holding by the owner. For real estate owners who receive real estate for a period of time, they will usually receive a grant in the form of lease or leasehold. Owners who receive unlimited property or forever will receive a grant in the form of a permanent or freehold. However, it is subject to certain taxes and rates-the freehold status of freehold will have to pay land taxes, while the Leasehold status has to pay land taxes and lease premium payments.
|Ownership||The asset is completelyyours at all times (unless limited real estate prevents public development).||The property must be returned to the state government as soon as the lease period ends (unless the lease period is extended).|
|Land Ownership||The land location of the property is built is the property of the owner.||The property owner only owns a home excluding land.|
|Land Use||Free to do development work subject to urban and environmental planning controls.||Any purpose or activity on the land is restricted depending on land legislation, town planning controls and the environment.|
|Land Distribution||Can be divided or distributed subject to town planning control.||Requires state government approval or equivalent.|
|Property Transfer||The transfer of ownership process is usually faster and easier, and usually takes less than six months to complete the process.||Change of ownership requires approval from the state government or its equivalent and usually takes between six months and almost a year.|
|Ownership Cost||Usually more expensive.||Purchase costs are usually 20 percent lower than equivalent freehold properties.|
|Value of Property||Greater property value appreciation over the long term.||High property value appreciation during the first 20 to 30 years but further depreciation as the lease term comes to an end.|
|Rent||Lower rental rates due to high participation costs.||Higher rental rates are acceptable due to lower purchase costs and more amenities, other additional incentives offered.|
|Margin Financing||It is easier to get financing from banks with a maximum margin of 90 percent.||It is difficult to obtain financing or accept a lower financing margin if the lease term is less than 40 years.|
|Additional Facilities||No additional facilities.||Leasehold properties usually have additional facilities such as gyms, playgrounds, halls, security guards and so on.|
Freehold vs Leasehold Malaysia: Buy Which House Is Worth It? Which Home Should You Choose?
The choice of whether to invest in freehold or leasehold is not a major issue to worry about. Basically, you can invest in any property according to your budget and ability. However, there are many things that need to be taken into account before deciding to buy any assets and are not limited to home prices and property ownership status. Freehold property for example is very limited especially if you live in areas around the Klang Valley such as Kuala Lumpur or Selangor. If you want to buy a leasehold property in Kuala Lumpur, you need to be sure:
- The remaining lease period exceeds 40 years. If the lease balance is less than 40 years, make sure this lease period is renewed;
- Have good road access and public transport;
- Buy a house near public facilities such as schools, hospitals, supermarkets and others;
- Property is below market price;
- Have high rental demand.
Theoretically on paper, the owner of freehold or independent holdings is said to be better than the leasehold or tax holding. However, it is advisable to evaluate the advantages and disadvantages of the property ownership status first before choosing any property ownership that is best for you. Take into account the locations, facilities, access and comfort that meet your needs and needs.
How Many Premium Rates Payable for Real Estate in Kuala Lumpur and Selangor?
For real estate in Kuala Lumpur, the amount of premium payable is based on the following formulas:
1/4 x 1/99 x (lease period – lease year remaining) x land area (sqft) x real estate market price in square foot (RM/sqft)
For example, Aiman has a 1,300 sqft condominium with a 30 -year lease period. The current market price of the condominium owned in the square foot is RM400/sqft. Here’s how to calculate the amount of premiums payable by Aiman:
1/4 x 1/99 x (99 – 30) x 1,300 sqft x rm400/sqft) = RM90,606
For Selangor real estate, owners are usually offered with two options. The first option, you only have to pay RM1,000 to renew the Leasehold property for 99 years. However, the state government will put a caveat that prevents you from selling the property. For the second option, you can pay the premium rate as usual based on the same formula as mentioned above. This will not cause problems if you want to sell your home.
Leasehold vs Freehold: Summary
In short, you can refer to the following list to get a clearer picture of the difference between freehold and leasehold. By knowing this leasehold and freehold difference, it can indirectly help you choose the right home type for you:
- Leasehold property ownership takes a long time than freehold property;
- The process of changing freehold property is easier and faster (less than 90 days) because it does not require permission from the State Government;
- Freehold property Bumiputera status can be sold to non -bumiputera buyers. However, it depends on certain situations as some freehold properties have restrictions on interests that may interfere with the change in the process of change;
- Approval of housing loans from banks for leasehold properties with a lease term of 40 years is usually difficult to approve;
- Leasehold real estate prices are lower and affordable than freehold real estate.
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