What is Leasehold Property and How Does It Affect Borrowing?

When most New Zealanders think about buying property, they imagine owning both the building and the land it sits on. But a significant portion of properties, particularly in some urban areas, retirement villages, and beachside locations, are sold on a leasehold basis. At Chaperone, we think leasehold is one of the more misunderstood ownership structures in the New Zealand market, and the implications for borrowing and long-term costs deserve careful attention before you commit to a purchase.

Freehold vs Leasehold: The Core Difference

With a freehold property, you own both the building and the land outright. With leasehold, you own the improvements on the land (the house, apartment, or other structure), but the land itself belongs to a separate party, often referred to as the ground lessor or landowner. Common ground lessors in New Zealand include local authorities, iwi organisations, the Crown, churches, and private trusts.

As a leaseholder, you pay ground rent to the landowner for the right to occupy and use the land. This is an ongoing cost that sits alongside your mortgage repayments and is not optional. The lease itself has a defined term, and when it expires, ownership of the improvements may revert to the landowner depending on the terms of the lease, although most long-term leases are renewed or negotiated well before this point.

Ground Rent Reviews and Cost Uncertainty

One of the most significant financial risks of leasehold property is ground rent review. Most leases include provisions for periodic review of the ground rent, often every 7 to 21 years, with the rent reset to a percentage of the current land value. In areas where land values have increased substantially, a rent review can result in a large step-up in the ground rent payable, sometimes making the property significantly more expensive to hold than it appeared at the time of purchase.

The unpredictability of future ground rent costs is one reason lenders view leasehold property with greater caution. It is worth understanding when the next review falls, how the review methodology is defined in the lease, and what the potential range of outcomes might be. A solicitor experienced in leasehold transactions can help you assess this.

How Lenders Approach Leasehold Lending

Lending on leasehold property is more complex than lending on freehold, and not all lenders will do it. Those that do typically apply more conservative terms, including lower loan-to-value ratios (LVRs), shorter maximum loan terms than the remaining lease period, and stricter serviceability criteria that account for the ground rent as an ongoing expense.

Lenders will want to review the lease itself as part of their security assessment. They will look at the unexpired term of the lease, the identity of the lessor, the ground rent review terms, and any restrictions on transfer or subletting. A lease with a short unexpired term, an unknown or financially unstable lessor, or unusual terms restricting the owner's rights may be difficult or impossible to finance with a mainstream lender.

Resale Considerations

The same factors that make leasehold harder to finance for you will apply to future buyers. This can constrain the pool of potential purchasers when you want to sell, and may affect the price you achieve relative to comparable freehold properties. Leasehold properties in some markets do trade at a discount to freehold equivalents, though this varies considerably depending on the landowner, the lease terms, and the specific location.

It is also worth noting that if ground rent increases significantly at a review before you sell, the impact on the property's running costs and affordability will be priced into any offers you receive.

When Leasehold Can Still Make Sense

Leasehold ownership is not inherently problematic. Many leasehold properties have long, well-structured leases with established lessors, favourable review terms, and a history of stable ground rents. In some locations, leasehold is simply the norm. The key is going in with a full understanding of the specific terms, a realistic view of the cost trajectory, and the benefit of legal and financial advice from professionals who understand the structure. A mortgage adviser can help you understand which lenders are comfortable with the specific property and on what terms.