Applying For A Home Loan? Know All About Leasehold And Freehold Properties
If you plan to apply for a home loan, you must understand the difference between freehold and leasehold properties. Freehold and leasehold properties fall into two different categories of legal ownership, and this can have a huge impact on the amount of money your bank extends to you as home loan.
MakaanIQ tells you the difference between freehold and leasehold properties.
You must have noticed that even when you buy a property, and have a mortgage bill (a legal agreement conveying the conditional right to ownership on an asset by its mortgagor to the mortgagee as a security) that proves your right to possession, the property may be considered as 'leasehold', and not 'freehold'. The difference is because of the type of legal 'ownership'.
If it is a leasehold property, it is built on land that belongs to the landlord, and the landlord is considered a 'freeholder'. Even if you own the property, it is still true that it is constructed on land that is owned by a freeholder. You as a leaseholder are expected to pay 'lease rent' for a fixed period called 'lease'. Once this lease expires (when all lease payments are made), the property along with the land becomes freehold, and comes into possession of the leaseholder (who now becomes a freeholder).
If you fail to make the lease payments for a fixed period, you will have no legal rights over the property, and this will lead to a 'transfer of ownership' from the leaseholder to freeholder.
When you purchase a freehold property, this means that you will be the owner of the property, along with the land on which it is built. You will not be expected to pay lease rent. The market value of the freehold property will remain high; banks will be willing to extend more as a home loan to you.
Which is easier to leverage -- freehold property or leasehold?
Bank loan for leasehold property: Lease agreements (for leasehold properties) are signed for decades, and a leaseholder has to apply for an extension and pay a certain amount of money after the lease period is completed (usually 99 years). The agreement has to be renewed after the term/lease is over, and till the lease exists, the legal rights remain with the landlord. Bankers and financial institutions require no-objection certificates (NOCs) from the authorities concerned to sanction a home loan for a leasehold property. For instance, New Okhla Industrial Development Authority (NOIDA) gives land to develop apartment/society projects on leasehold.
A development authority (freeholder) grants a 'Transfer Memorandum' to the owner of the property, granting ownership rights to the buyer. You should submit this document while applying for a bank loan for the leasehold property.
Leasehold property transactions are done through a General Power of Attorney (GPA). This is so because if the landlord/freeholder dies, the GPA will have the authority to transfer the property.
Bank loan for freehold property: Freehold properties are considered a safer investment. This is because the registration of freehold property is already done, and freehold properties are likely to rise in value in the long run. The higher the market value of the property, the greater the chances of the bank sanctioning a larger home loan amount (loan-to-value is 80 per cent of the market value of the property). A freehold property owner also has complete rights over the property, including the right to transfer, repair, renovate or sell the property.
What you should know as a home loan seeker
As a prospective home loan borrower, you must understand that merely physically possessing the property is not enough. Lenders verify the property against which a home loan is taken -- from a legal and technical point of view. Lenders do the legal viability check to ensure that the title is clear and marketable. There is a long chain of documents involved when the ownership of a freehold property changes.
It is advisable to check the title of property and the relevance of the chain of ownership documents at the office of the sub-registrar concerned. You will be expected to pay a nominal fee for this service. But this will save you from potential losses due to misrepresentation/fraud in the title of the property.