In the UK, you can buy a property and still be a tenant

Perhaps in no other European country is the obsession with homeownership so entrenched as in Britain. The ambition to “get on the property ladder” underpins almost every young person’s dreams, pushing young people to make sacrifices to save for a deposit and then take on a big mortgage just to be able to say they own, rather than rent, their home.

But do they, in fact, own it? Increasingly, property ownership is becoming an illusion that makes people part with cash they can ill afford to spend.

There are situations in which the homebuyers are still, in effect, tenants. First, strictly speaking, when one takes out a mortgage, the owner of the house until the mortgage is paid off is the bank. In other words, the “homeowner” in fact rents from the bank.

There are advantages compared with a straightforward tenancy. A normal tenancy is for six months, a year maximum, with the possibility of renewal. The tenant has few rights, for instance putting up shelves or even hanging a picture normally cannot be done without the landlord’s approval.

On the flip side, the tenant has no expense if something breaks down due to wear and tear — it is the landlord’s responsibility to fix it. Also, if house prices fall, the tenant does not have to worry about being pushed into negative equity – just as the tenant does not enjoy the benefits of rising house prices.

Renting from the bank means that the person can make changes to the house (within the conditions of the mortgage), is responsible for the costs associated with repairs and takes the risk of falling house prices and negative equity (enjoying of course the profits when house prices rise).

Over the past four decades if not more, it looked like the only way for house prices was up, so it’s no wonder that people prefer homeownership. Also, the lowest interest rates on record have made mortgage installments cheaper than rent, so buying a house seems to be the best choice.

However, a house bought is one less traditional tenant on the market, so one less source of revenue for landlords. Worryingly, a new trend seems to be taking contour: house sellers trying to have their cake and eat it too (probably inspired by Boris Johnson’s take on Brexit).

The Guardian reports on this trend in an article about how developers selling new flats sell them leasehold when they should be freehold. The leases are long, 999 years, so there doesn’t seem to be a problem — until the buyer discovers, usually too late, that a clause buried in the small print allows the freeholder to double the ground rent every decade. There are also cases in which the freeholder has the right to decide on what kind of changes the “homeowner” can make to the “property.”

This quirk of the British property buying system, namely “leasehold” buying, needs addressing. Normally, when buying a property one expects to own it in perpetuity and to be able to make any changes desired, within the limits of planning permission. You cannot sell a home and retain part of it or rights to it. Just like you can’t have your cake and eat it too.