What is ground lease (erfpacht)?
Ground lease (erfpacht in Dutch) is a contract giving you the right to build and use property on land, which is owned by the municipality or a private party. The ownership of the land remains to the landlord, if you build or buy a property on the land with ground lease, you have to pay a fee to the municipality. This fee is in Dutch called ”erfpachtcanon”.
The value of the ground is determined by an independent appraiser.
This ground is part of the value of your house, as you cannot sell the leasehold value separately. The appraiser will look at, among other things: market value (ground plus property), purpose of ground and its actual use, size and state of property, and the location of the ground. This value is the basis for the determination of the lease.
Temporary ground lease
There are two types of ground lease (also called leasehold) in Amsterdam: Temporary and perpetual. The temporary ground lease has a periodic revision, usually every 50 or 75 years. This means that the leasehold is recalculated based on the value of the land at the time of revision. There is a high chance that the value of the land has increased over time, leading to higher monthly costs for the lessee as a consequence. Because this brings discomfort for leaseholders, mortgage providers and real estate agents, the municipality of Amsterdam introduced the perpetual ground lease in June 2017.
How does it work?
Temporary leases (also called continuous ground lease, renewable lease or in Dutch tijdelijke erfpacht) typically last 50 or 70 years, after this the rent is recalculated based on current land value, often leading to rent increases. After the end of the lease period, the contract is suject to renewal or renegotiation, with the ground rent recalculated based on current market value of the land.
This recalculation typically causes rent increase as the land value has appreciated (became higher) significantly. The leaseholder benefits from using the land but faces uncertainty regarding future costs as the ground rent (canon) can rise.
Financial implications
The rent you pay can rise significantly due to the increase of land value. Temporary lease entensions may add additional costs. Rent increases can be a burden in larger cities such as Amsterdam, Rotterdam or The Hague, adding to expenses next to the purchase of property.
Impact on your mortgage
Lenders see temporary ground lease often as riskier due to uncertain future costs, which can limit the mortgage capacity. The possibility of rent increase when the lease period has ended and rent is recalculated for renewal of the lease contract, affects a lenders assessment of the borrowers ability to repay. Mortgage loan might require special conditions or guarantees for properties on temporary ground lease contracts.
And what about perpetual ground lease?
With perpetual ground lease, the land rent is determined only once. The rent will remain the same forever, it is only adjusted for inflation annually. In other words: the ground rent will not be revised anymore. Current ground lease holders will receive an offer from the municipality to switch to the new system. You may wonder what the best option for you is.
The website of Amsterdam on ground lease has some additional information (in English).
How does perpetual lease differ?
The perpetual ground lease represents an indefinite (fixed) lease agreement where rent is adjusted annually for inflation, not based on land value. This means the ground rent remains stable over time, providing homeowners with financial security and protection against high rent increased. Perpetual ground lease agreements are preferred by homeowners, mortgage lenders and property buyers as this type of arrangement reduces fianncial risks related to ground rent.
Financial implications and buy-off options
With a perpetual ground lease, property buyers have the option to buy off their ground lease by paying a large sum to acquire the lease rights indefinitely, effectively ending the payment of canon (rent) obligation in the future. This buy off amount is based on factors such as property assesment value and lease terms. If you choose to buy off the lease, this can increase the property value and lowers ongoing housing costs. Upfront payment is fiancially advantageous for homeowners that are planning to keep their property for many years.
Impact on mortgage and property value
Generally, property ground leases have better mortgage terms and market appeal. This is due to the predictable nature of ground payments with perpetual contracts. This increases the creditworthiness and can be in great advantage for the borrower, leading to higher mortgage capacity and lower interest rates.
How does ground lease affect my mortgage?
Lender perspective and risk assesment
When calculating your maximum mortgage, the mortgage provider will both look at your income as well as your expenses. Mortgage lenders evaluate the conditions and type of ground lease when assessing eligibility. Lenders typically favor perpetual lease as temporary leases carry higher perceived risks due to uncertain future costs. For perpetual ground lease with no recurring expenses, this does not affect your loan capacity. A temporary leasehold, or a leasehold that has a yearly compensation does affect your maximum mortgage. Lenders may require financial documentation, stricter loan-to-value ratios and will demand higher interest rates. Perpetual ground lease contracts, with stable rents are lower risk and lead to better loan offerings.
Loan size and terms
Temporary leases come with limits in mortgage capacity because of unpredictable rent increases affecting financial affordability. The interest rates may also be higher and loan term shorter or with specific restrictions. Loans with perpetual leases often allow for higher mortgage loans, lower interest rates as it is considered less of a risk for mortgage lenders.
Guidance for expats and foreign buyers
Expats buying property with ground lease, unfamiliar with the Dutch ground lease system, should seek specialists who understands local ground lease laws. Mortgage brokers experienced with ground lease issues can guide expats efficiently through the purchase process, avoiding surprises and making sure to secure the best loan and lease conditions.
