Buying a house with ground rent
You may have noticed in your house-hunting efforts that the asking price for ground rent agreement-subjected homes is often lower than for homes without ground rent. The reason for this is that when you buy a house that is subject to ground rent, you only buy the house and not the land, whereas if you purchase that is not liable for ground rent, you own both the property and the land it’s built on. For ground rent agreement-subjected properties, you pay a type of rent for the use of the land: the ground rent. We’ll explain how this works.
What is ground rent?
The fee for the use of the plot of land on which your house stands is called the ground rent. This is in addition to your mortgage payments, and is a type of rent that you pay to the owner of the land. In the case of municipal ground rent properties (gemeentelijke erfpacht), the owner of the property is the municipality. For example, if the owner is a water board, church or private person, then these are referred to as private leasehold.
About the ground rent agreement
The ground rent agreement states the amount you pay for the use of the land. You will typically pay about 5% of the land value in ground rent every year. The land owner usually revises the amount every 5 to 10 years. With municipal ground rent agreements, this revision timeframe is often longer. Ground rent is tax deductible, as is the case with mortgage interest. Sometimes you can also buy out the ground rent agreement. In that case, only the additional borrowed amount for the buy-out is tax deductible, the buy-out figure itself is not.
Example:
An annuity mortgage of €200,000 with an interest rate of 2.5% without ground lease gives a gross monthly mortgage expense of €790 (around €600 net).
When not buying out the ground lease: (for example, in a situation with a canon obligation* of €1,000 per year): The gross monthly mortgage expense increases to €874 (around €710 net).
When buying out the ground lease: (for example, one-time €30,000, which increases the mortgage to €230,000)**: The gross monthly mortgage expenses increase to €909 (around €765 net).
Buying out the ground rent
Sometimes you get the opportunity to buy out the leasehold. The advantage of this, is that you can incorporate the buy-out in the mortgage loan, and are permitted to include it in the determination of the market value of your house. The disadvantage is that you will have to sell the house – especially in the first years after a buy-out – for a higher value in order to recuperate the buy-out amount.
Disadvantage of ground rent properties
A major disadvantage of ground rent properties is not knowing exactly how much you will have to pay in future in terms of ground rent. After the ground rent period in the current agreement has expired, the owner can adjust the ground rent; for example, because the value of land has increased. That is a risk that you will have to take into account. Of course, you’ll want to prevent your ground rent from rising to the degree that you can no longer comfortably afford – nor are willing to pay – the monthly charge.
The influence of a ground rent agreement on your mortgage
In order to finance a house on that is subject to ground rent, there are a few points of attention that lenders pay heed to. The most important are:
- Has the ground rent agreement been bought off?
- Is the ground rent due annually?
- Is it a municipal or private ground rent agreement?
- When is the ground rent amount up for renewal?
In this article, you can read more about financing a house on ground rent land.
Ground rent land in Utrecht, Amsterdam and The Hague
Are you looking to find out more about ground rent land? These websites offer more information:
Happy to help
We are always happy to assist you in looking for the best way to finance your home and ground lease. Feel free to contact us to make an appointment so that we can explore the possibilities together.
Sources and background information
- Tax Authorities (Belastingdienst) – Fiscal regulations regarding the deduction of mortgage interest
- Tax Authorities (Belastingdienst) – Periodic payment of ground lease
* Canon is deductible
** The interest rate on this loan is deductible