In Amsterdam, there are about 110.000 homes with municipal long leases. For these owners, the ground rent is reset every 50 or 75 years. So in Amsterdam, erfpacht is a common phenomenon.
What exactly is erfpacht?
Erfpacht is an arrangement whereby land ownership remains with the municipality, while the user of the land pays an annual canon (fee) for its use. It is widely used in Amsterdam and can involve both residential and commercial properties. Leasehold contracts are reviewed periodically, and the canon can be adjusted based on current land values. The choice of whether to buy off the ground lease, fix it or not accept the municipality's proposal at all can be complex and depends on several factors. Let's take a look at the pros and cons of each scenario.
Option 1: Buy off ground rent
Advantages:
1. Financial Security: By buying out the ground rent, you pay a one-off amount that avoids future canon payments. This provides security and protection against future canon increases, which can be especially beneficial if you want to live in the property for a long time.
2. Increase property value: Buying out the ground rent can increase the value of the property. Potential buyers are often willing to pay more for a property without ground rent, as it carries less risk and lower living costs in the future.
3. Mortgage benefits: Banks often consider a property without a long lease to be less risky, which can result in more favorable mortgage terms or lower interest rates.
Disadvantages:
1. High Costs: Buying out the ground rent can be a significant investment, often tens of thousands to sometimes hundreds of thousands of euros. Not everyone has these funds readily available, and an additional loan may be necessary, which can increase monthly costs.
2. Lack of Liquidity: Redemption requires a large sum of money, which means your liquidity is tied up in the property and not available for other investments or emergencies.
Option 2: Leasehold Fixed (Index canon)
Advantages:
1. Stable Cost: By fixing the ground rent, you pay a fixed canon for a certain period of time, say 10, 25 or 50 years. This gives more certainty about monthly costs and protects against sudden increases.
2. Flexibility: You retain more financial flexibility than with full redemption, as the one-off costs are much lower.
3. Financial Planning: For people who want to plan their financial obligations without the large initial cost of redemption, fixing can be an attractive option.
Disadvantages:
1. Permanent Payment Obligation: Even though the cost is fixed, you continue to pay an annual canon. In the long run, this can still cost more than buying out, depending on how long you stay in the property.
2. Unpredictable Future: After the agreed period, the canon will be reset, potentially leading to higher costs depending on land price increases.
Option 3: Not accepting municipal proposal
Advantages:
1. No direct costs: By not going on the municipal proposal, you avoid direct costs associated with buying out or fixing the ground rent.
2. Flexibility: For example, if you plan to sell the property in the near future, it may not be worth investing in buying out or fixing the ground rent.
Disadvantages:
1. Uncertainty: If you disregard the municipal proposal then it may mean that you have to deal with unpredictable canon increases, especially as the land price review approaches.
2. Property depreciation: A property with a ground rent that has not been bought out or fixed may be less attractive to buyers, resulting in a lower sale price.
Conclusion
The choice to buy off the ground rent, fix it, or not take up the municipal proposal depends heavily on personal financial circumstances, future plans and risk tolerance. For those for whom financial security and potential increase in property value are important, buying out may be attractive. For those who prefer a balance between predictable charges and short-term cost savings, fixing may offer a good middle ground. Finally, if finances are limited or one expects to sell the home in the short term, not responding can also be a conscious choice.
It is always wise to seek professional financial advice to thoroughly evaluate the options and make an informed decision.
