What is ground lease and what should you look out for?
In a number of major Dutch cities – including Amsterdam and the Hague – houses are sometimes not built on private property. The owner of the land gives the buyer of the property the right to use the land, but does not actually sell the land itself. This is called ground lease. In this article we will explain more about ground lease and what influence it can have on the financing of your home.
When purchasing a home on ground lease land, you become the owner of the house, but not the land. The owner of the land will charge you an amount for the lease of the land. This is the canon obligation. You can pay this fee annually, but also for a certain number of years or through perpetual buyout. In most cases, the owner of the land is a municipality. For example, in Amsterdam, almost 60 percent of all properties are situated on municipal land.
Buying out of the ground lease
Sometimes you will be given the opportunity to buy out the ground lease. Whether this is a good idea depends on your personal situation. We are happy to provide you with financial advice. In the first years, a (perpetual) buyout will lead to an increase in monthly expenses. However, you will also have the following advantages:
- The buyout can be co-financed in the mortgage loan and is one-to-one value increasing when determining the market value at the basis of the maximum mortgage.
- The interest on the loan is deductible in principle.
- No more uncertainty about the canon amount in the future and the landlord’s policies.
- When selling the property, there will be no obstacles and uncertainties for potential new buyers.
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).
What are the consequences of ground lease for the financing of a home?
There are a number of aspects that lenders consider for the financing of a house on leased land. The most important are:
- Has the ground lease been bought out?
- Is an annual payment of ground lease canon required?
- Is there private ground lease?
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