Leasehold – owning a home without buying land

The dream of owning a home exists in many people, but it is increasingly difficult to find a suitable property for the construction of their own four walls. A concept that promises to create relief is the principle of leasehold that is becoming more and more widespread. But what exactly is a leasehold at all? What costs are involved and is it really better than buying a property? You can find out more about this topic in our guide to buying or renting.

Leasehold instead of buying land – is leasehold really worth it?

Leasehold is a welcome alternative to the traditional purchase of land. The principle is very simple. The owner of a plot of land leases it to a house builder or buyer of the house standing on it. So there is a clear separation. There is one owner who owns the land and one who owns the building on the land. This principle attracts great savings for land prices for the buyer and at the same time ensures regular cash income for the lessor again and again for a long and regular period of time. It is a good possibility with lack of building sites fast and favorably to the home of one’s own to come. However, there are also pitfalls hidden here.

No land costs but ground rent – costs at a glance

The principle of the ground lease includes the fact that you do not acquire a plot of land and therefore do not own one but still have to pay for it. Because with a ground lease you commit yourself to pay a certain amount to the owner of the land at regular intervals, i.e. to the lessor. It is similar to renting, only that here no living space is rented, but the land. This amount is called ground rent or ground rent and is between 4 and 8 percent of the actual purchase price of the land per year, depending on the size and location of the land.

Since you are the buyer and owner of the property on the land, a lease term is established for leases. This is stated in the lease agreement and decided between the parties. Here, there are common terms that are concluded in most cases. Mostly the terms range from 50 to 99 years. Very rarely, there are also terms of 25 years, but these should only be agreed upon if expressly requested. How long you want to lease a plot of land should be considered well in advance, because there are advantages and disadvantages for each term. With a lease term of 25 years, you will have large sums of money to raise over a short period of time. The advantage, however, is that this term will not outlast your own lifetime and you will therefore not leave any debts or contractual obligations to your children.

If you buy a property in Germany, you have to pay the so-called land transfer tax. Unfortunately, this is also levied on leaseholds, even if you do not buy the property. The amount of the land transfer tax depends on the value of the property and is calculated as a percentage of this value. It only has to be paid once and is due immediately after signing the contract, just as with a purchase. The same rates apply as for a sale.

Is the ground rent really worth it?

Is a ground lease worth it compared to a purchase? This question cannot be answered in principle, as the costs depend on the land prices. If these are high, the ground rent also rises sharply and leasing becomes more expensive. In general, one can only say that a lease is worthwhile if the ground rent is lower than the mortgage interest. It must be noted, however, that a lease usually binds for 99 years, so for a long period of time to a monthly or annual contribution is bound. In the lease agreements, an adjustment clause is agreed upon, which allows for an increase in the interest rate. This means that the interest rate can be adjusted every three years and therefore there is a risk that it will increase. With a loan, the risk of interest rates going up is much lower. You should therefore be aware of the conditions and think through a lease carefully.

Expiry of the lease – and now?

Before the lease period expires, it should be clear what is to happen to the land after the period expires. It is possible for the leaseholder to secure a right of first refusal and thus buy the land after the lease expires. However, if nothing is agreed, the tenant has the right to compensation for the value of the building at the end of the lease term. In return, however, he does not have to remove the building from the land. If the tenant does not pay the rent for a certain period of time or uses the land in a different way than agreed, a reversion occurs. This means that the land will revert to the lessor before the expiry of the lease term. However, all these provisions should be clearly set out in the leasehold agreement.

Land purchase & loan interest – costs at a glance

Buying land is comparatively more profitable. Firstly, you own the land when you buy it and don’t just ‘rent’ it through a lease. In addition, the buyer usually pays off the loan after 10 – 20 years and then owns the land debt-free and the loan interest remains over the entire term at the agreed level and does not increase, as with the lease. A leasehold is therefore only worthwhile in comparison to the purchase, if there is a high-interest phase. Otherwise you should fall back on alternatives. This includes, for example, the complete purchase of property and land together, which is ideal when the construction interest rates are low. So think carefully about which alternative is the best for you and which is available on the current interest rate market.

Legal situation – leasehold or purchase of land

From a purely legal point of view, the builder of a plot of land acquired by ground lease is almost equivalent to the buyer of a plot of land. He acquires the land from a private person, the public sector, a non-profit organisation or an ecclesiastical institution. Thus, the leaseholder is the owner of the land for a fixed period of time. The heritable building right continues to apply to him even if the property is foreclosed or even destroyed. He therefore has the right to sell, rent, bequeath and lend his leasehold, but even in the event of a change of ownership, the lease agreement does not change.

Generally speaking, the hereditary building right does not permit any land speculation, as the holder of the hereditary building right is obliged by the contract to build on the land. This right is documented in two land registers, the land register and the hereditary building land register. This is made to secure the builder. Once an amount has been agreed, the hereditary building right cannot be terminated. It expires only after the time specified in the contract, which is usually 99 years.