Freehold vs Leasehold Property: Meaning and Home Loans

Freehold property is owned outright, land and building, with no end date. Leasehold property gives you the right to use the property for a fixed term, typically 25 to 99 years, while the land stays with the lessor, usually a development authority. Lenders do finance leasehold homes, but they check the remaining lease term and may need the lessor's permission to mortgage.

Freehold vs leasehold: the difference

Under Section 105 of the Transfer of Property Act, 1882, a lease of immovable property is a transfer of a right to enjoy that property for a certain time, express or implied, or in perpetuity, in return for a price paid or promised. In a freehold sale, the full ownership passes to the buyer. In a lease, only the right to enjoy the property passes; the lessor keeps ownership.

What is a leasehold property in India

Many homes built on land allotted by development authorities are leasehold. The authority stays the lessor, and the flat or plot owner is a lessee or sub-lessee. Tata Capital, a housing lender, describes typical lease terms of 25, 30, 50 or 99 years.

A long lease must be registered. Section 17(1)(d) of the Registration Act, 1908 makes registration compulsory for leases of immovable property from year to year, for any term exceeding one year, or reserving a yearly rent. Under Section 49, an unregistered document that must be registered cannot affect the property or be received as evidence of the transaction.

How leasehold affects a home loan

Banks and HFCs lend on leasehold homes every day, but they add checks:

• Remaining lease term. Tata Capital advises that the home-loan tenure should not exceed the remaining lease period, because the lender carries the risk if the lease is not renewed. With home-loan tenures of up to 30 years at banks such as HDFC Bank, a lease with only a few decades left can shorten the loan you are offered.
• Permission to mortgage. HDFC Bank's disbursement checklist for Nagpur asks for "permission to mortgage from development authority, transfer order and tripartite agreement (applicable in lease hold property)" and the latest tax-paid receipt.
• Stricter criteria. Tata Capital notes some lenders apply stricter eligibility and ask for extra documents for leasehold property.

RBI's LTV caps apply to leasehold and freehold homes alike: up to 90% of the property value for loans up to ₹30 lakh, 80% for ₹30–75 lakh and 75% above ₹75 lakh.

Converting leasehold to freehold: the DDA example

Delhi Development Authority runs the best-documented conversion scheme. Its brochure "Scheme of Conversion from Leasehold System into Freehold", April 2014 (modified), covers Janta, EHS, LIG, MIG, HIG and SFS flats, including Asian Games Village flats, built before 1992 on leasehold. Key rules from the brochure:

• Conversion is optional.
• If the flat is mortgaged, the conveyance deed is executed only after an NOC from the lender.
• If there is a legal dispute over title, conversion waits until it is settled. Pending mutation must be completed first.
• Buyers holding a GPA or agreement to sell can apply, with proof of possession and the link to the original allottee. A GPA or agreement to sell executed from 24 September 2001 onwards must be registered.
• Purchaser/GPA cases pay a surcharge of 33⅓% on the conversion charges.
• A complete application is decided within 45 working days. The conveyance deed must be stamped by the Collector of Stamps and registered with the sub-registrar.
• Stamp duty and registration charges are paid by the person in whose favour the conveyance deed is executed.

DDA flat conversion charges

The brochure lists net conversion charges with effect from 12 August 2011. They are provisional; DDA says final rates are set by the Ministry of Urban Development, and any difference is payable. Confirm the current figure with DDA before you apply.

Documents DDA asks for include an affidavit and indemnity bond on its formats, proof of physical possession, the demand-cum-allotment letter and possession letter, the lender's NOC if the flat is mortgaged, the mutation letter if applicable, and ground-rent details.

DDA plots and expired leases

For DDA plots, DDA's FAQ says conversion applications are made online through its IDLI system. The same FAQ says there is presently no policy to convert properties whose leases have expired, and that institutional plots are available only on leasehold.

Which should you buy?

• Freehold is simpler to sell, gift, inherit and mortgage, with no lessor approvals or lease rent.
• Leasehold is fine when the remaining term is long, the lease deed is registered, ground rent is paid up and the authority allows transfer and mortgage. Check whether a conversion scheme exists and what it costs before you price the deal.
• Short remaining lease is the main risk. It can limit loan tenure and resale value, and an expired lease may not be convertible, as the DDA FAQ shows.

Checklist before buying a leasehold home

1. Read the registered lease deed: start date, term, renewal clause, use restrictions and transfer conditions.
2. Get a no-dues statement for ground rent or lease rent from the authority.
3. Confirm mutation is in the seller's name and the transfer chain is complete.
4. Ask the authority about transfer charges and permission to mortgage, and ask your lender for its leasehold document list early.
5. Check whether the property can be converted to freehold, and the cost.
6. Match the loan tenure to the remaining lease. Use the EMI calculator to see how a shorter tenure changes the EMI.

For other ownership types banks finance, see types of property in India.

Sources

Transfer of Property Act, 1882, Section 105 (India Code): https://www.indiacode.nic.in/show-data?actid=AC_CEN_3_20_00042_188204_1523272233671&orderno=113
Registration Act, 1908 (India Code): https://www.indiacode.nic.in/bitstream/123456789/15937/1/the_registration_act,1908.pdf
DDA, Scheme of Conversion from Leasehold System into Freehold, April 2014 (modified): https://dda.gov.in/sites/default/files/Housing%20Department/Conversion%20Brochure%20Modified-2014.pdf
DDA, General FAQs (land disposal): https://dda.gov.in/land-disposal/General_FAQs
HDFC Bank, disbursement checklist (Nagpur): https://homeloans.hdfc.bank.in/content/dam/housingdevelopmentfinancecorp/hdfc-ltd-merger/region-pdf/west-region/Nagpur.pdf
HDFC Bank, Home Loans: https://homeloans.hdfc.bank.in/housing-loans/home-loans
Tata Capital, What is leasehold property: https://www.tatacapital.com/blog/loan-for-home/what-is-leasehold-property-know-everything-about-leasehold-property/