The $150k Catch: Why Banks Are Terrified of Leasehold Properties

A quick heads-up before we dive in: This article is strictly for general informational purposes and does not constitute financial, legal, or tax advice. Every situation is entirely unique, and bank lending policies change frequently. Before making any decisions about your property journey, it is highly recommended that you seek independent advice from a qualified financial adviser and your property lawyer.

If you have been hunting for a property in the central city or near the waterfront, you have probably stumbled across a listing that made you do a double-take.

A beautiful, modern, two-bedroom apartment with harbor views... listed for just $150,000.

While your first instinct might be to immediately call the real estate agent and empty your KiwiSaver, there is a very specific, expensive reason that property is so cheap: the title is Leasehold.

For everyday first-home buyers, leasehold properties are often a massive financial trap, and New Zealand banks treat them with extreme caution. Here is a look at how leasehold actually works, the dreaded "ground rent" trap, and why getting a mortgage for one is so difficult.

What is a Leasehold Property?

To understand why banks are so nervous, you need to understand what you are actually buying.

When you buy a standard freehold property, you own the building and the dirt it sits on forever. When you buy a leasehold property, you only own the building. You do not own the land underneath it.

Think of it a bit like buying a really expensive, immobile caravan and parking it in a holiday park. You own the caravan itself, meaning you are completely responsible for maintaining it, fixing the roof, and keeping it looking sharp. But you don't own the patch of grass it sits on—you have to pay rent to the park owner just to keep it there.

In real estate, the golden rule is that buildings depreciate (wear out and lose value over time) while land appreciates (goes up in value). With a leasehold, you are taking on the financial burden of maintaining the part that wears out, without getting any ownership stake in the dirt that goes up in value!

Instead, you are essentially renting the dirt from a landlord (the freeholder) for a set number of years. Because you are only buying the physical structure and not the valuable land, the upfront purchase price is drastically lower.

The Danger Zone: Ground Rent Reviews

Because you don't own the land, you have to pay the landowner rent for the privilege of letting your house or apartment sit on their dirt. This is called Ground Rent, and it is entirely separate from your mortgage payments, your rates, and your Body Corporate fees.

Here is where the trap snaps shut: Ground rent is not fixed forever.

Lease agreements usually include a Ground Rent Review clause, which allows the landowner to recalculate the rent every 7 to 21 years based on the current value of the land. If you buy a leasehold apartment and the land beneath it doubles in value over the next decade, your ground rent could easily double—or even triple—overnight.

There are famous cases in New Zealand where leaseholders were happily paying $4,000 a year in ground rent, only for a rent review to suddenly bump it to $16,000 a year. If you cannot afford the new rent, you may be forced to sell the property at a massive loss.

How the Banks View Leaseholds

Because of the unpredictable nature of ground rent, banks view leasehold properties as highly risky. If they are going to lend you money, they will put up several massive roadblocks:

1. The 50% Deposit Rule

If you are buying a standard freehold house, you usually need a 20% deposit. If you are buying a leasehold property, banks will often demand a 40% to 50% deposit. They know that as a lease gets closer to its expiry date, the property actually drops in value. They require a massive deposit to ensure they don't end up losing money if you default on the loan.

2. The Strict Affordability Test

When the bank calculates how much you can borrow, they will look at that annual Ground Rent fee and deduct it straight out of your usable income. If there is a rent review coming up in the next few years, the bank will often "stress test" your application by assuming the ground rent is going to drastically increase, which severely limits how much they will let you borrow.

3. Matching the Loan to the Lease

Banks will almost never give you a mortgage that lasts longer than the land lease. If you want a standard 30-year mortgage to keep your payments low, but the land lease expires in 20 years, the bank will force you to squash your mortgage into a 15-year or 20-year term. This makes your minimum weekly mortgage payments significantly higher.

Should You Ever Buy a Leasehold?

Leasehold properties are not inherently evil, but they are generally best left to highly experienced property investors who have the spare cash flow to absorb sudden rent hikes, or retirees who want to free up cash and don't care about leaving property to their kids.

If you are a first-home buyer trying to build long-term wealth, leasehold is almost never the right strategy. You are missing out on the one thing in real estate that consistently goes up in value: the land.

How Home Loan Factory Can Help

When you are scrolling through listings on your phone, it isn't always immediately obvious if a property is freehold, unit title, or leasehold.

At Home Loan Factory, we are here to be your second pair of eyes. Before you fall in love with a property that seems suspiciously cheap, send the listing to our team. We can instantly identify if it is a leasehold, show you exactly how the banks will assess the deposit requirements, and keep your property journey heading safely in the right direction.

Spotted a property and want to know if the bank will actually lend on it? Get in touch with the team at Home Loan Factory today for a quick, easygoing chat.