The Disadvantage Of Buying Leasehold Property}
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Submitted by: Khoo BT
When buying a new house, be it for own occupancy or for investment, there are many factors to consider and one of the most important thing to note is the type of land that the house or property is to be built on.
There are in general two types of land namely freehold or leasehold. As far as freehold land is concerned, the owner own the land in perpetuity until he sells the land whereas in leasehold land, the land is only leased to the buyer for a certain number of years, usually 99 years.
While it has been widely advocated that there is not much difference between the two types of land as a 99 years lease is long enough to serve 3 to 4 generation considering the overlapping lifespan of parents and children.
The truth is if the house is bought for the purpose of own occupation and will not be sold, then there is indeed not much difference between leasehold and freehold houses. In fact there is advantage for the buyer who buys leasehold house as normally leasehold houses are being sold at lower price compared to the freehold houses.
However when a leasehold house is being passed from parent to children when the parent passed away. The length of remaining lease will probably in the region of 70 years or less. Should the child decide to sell the house, he may face some difficulty in finding buyer for his leasehold property as the margin of finance offered by the financial institution decrease with the decrease in the length of lease. For a land with lease of 70 years or less, the margin of finance can be 70% or less. This is a far less than the 95% offered to freehold houses. Therefore it is difficult to find buyer for leasehold property with short remaining lease unless the buyer is willing to fork out 30% to 40% of purchase price as down payment and if indeed the purchaser can afford such a large down payment, he or she would probably consider buying freehold property of higher value.
As the margin of finance decrease with length of remaining lease of leasehold property, it is unlikely that a leasehold property will appreciate with the pace of freehold property. Therefore be it for own occupation or for investment, it would be wise to avoid leasehold property.
About the Author: Mr BT Khoo is the webmaster of Malaysia Real Estate,
, the property listing website in Malaysia