Picture this: you drive by the highway, and you see a huge billboard showcasing a new property launch nearby. The word “FREEHOLD” is displayed predominantly. What could it mean? And why is it so important that it takes up so much space in the billboard?
Most properties here in Malaysia are classified under either leasehold or freehold, and it is actually tied into the plot of land where the property sits upon, rather than the property itself.
Freehold land is where the state government sets aside a plot of land and sells or gives it to an individual, corporation or entity indefinitely. Meaning, in effect, the new owner of the land owns the land in perpetuity.
Leasehold land, as the name suggests, is where the state government leases the land away for a set duration, usually 99 years, but can range from 30 to 999 years. There are plenty of restrictions, with do’s and don’ts which we will get into shortly.
Does it matter? Why yes it does. It changes how the land is viewed from a bureaucratic point of view, it will leave a significant impact on the value of the home and your investment decisions.
Here are some of the factors that you should consider when buying a leasehold property:
1. Value of property may be lower than freehold
While leasehold property prices are generally equal to, or even higher than freehold properties during the first 20 to 30 years into the 99 year-long lease, the value of leasehold properties usually stagnates or depreciate until the expiry of the lease.
2. Takes longer to sell
Unlike freehold titles, you do not technically “own” the property, and only the state authorities or equivalent can grant the transfer of the lease. The process usually takes six months to a year, and this makes property selling a more cumbersome process. However, for leasehold properties bought directly from the developers, the process will not consume as much time.
3. Securing financing
Most banks are uncomfortable giving out loans for properties with less than 50 years remaining on the lease, due to their risk-averse nature. If you are looking to buy into the sub-sale market, even if you are able to secure the financing, the margin of financing will also be lower in comparison to freehold properties, which means more downpayment.
However, there are still upsides to buying a leasehold property, due to:
1. Renewable lease
It is still possible to renew and extend the lease with the local state authorities, by just paying a sum of money. The calculation differs from state to state, but you are generally looking at five-digit figures, depending on the value of the property, and the number of years left into the lease.
2. Leasehold is generally cheaper
Assuming that all other details are equal, the price of a leasehold property is often around 20% lower than a freehold.
3. Better value
To entice buyers to purchase leasehold properties, you will notice that developers will usually offer more facilities, features, and even incentives for the leasehold properties in an effort to remain competitive in the property market.
Despite being freehold land, it is still possible for the state government to seize back freehold land under the Land Acquisition Act 1960, if it is for public purposes, such as infrastructure or economic development. Under this scenario, the owner of the property will be compensated for the market value of the property.
Which is better? There is no single definite right or wrong whether you should buy into a leasehold or freehold property. It generally depends on your personal choices, needs and wants, and financial capabilities.
From a general, layman perspective, if you wish to buy a home in the hopes of leaving it to your children and grandchildren, taking a freehold property will probably be a better bet. However, if you are on a budget, and wish to dispose of the property in the short term, leasehold works perfectly fine as well.
Hence, it is important to do your due diligence as a homebuyer, and make the final choice on what is best for your family, yourself and your wallet.
Has this article narrowed down your options for which property is best suited for you? Ohmyhome can do even more than that, because, through our dedicated buyer’s agent services, we are able to assist you in the home buying process, from property search all the way to receiving your keys!
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