Owning your own plot will always be cheaper than renting one in the long run, even though the total costs of renting a plot are lower in the short term.

“The difference in favour of freehold plots increases rapidly at 20–25 years," says Satu Astala, CEO of OP Koti Uusimaa.

If the price of a plot of land is 100,000 euros, and the rent paid for the corresponding plot is 4 per cent, or 4,000 euros per year, the total costs of a rented plot and a freehold plot would be equal after 25 years without rent increases. However, a freehold plot increases the homeowner's wealth through repayments, unlike plot rent. 

However, the final result of the comparison is affected by many things, such as rent increases for a leased plot and loan interest rates for a freehold plot. Let's first look at the actual costs of a leased plot.

How much can a leased plot cost over 25 years?

The rent for a leased plot is most commonly increased annually in line with changes in the consumer price index. Over the past 25 years, the consumer price index has increased by an average of 1.9 per cent per year.

If the annual rent for a leased plot is 4,000 euros, the total annual rent costs over 25 years with an annual increase of 1.9 per cent would be approximately 157,000 euros.

The monthly rent for the plot would increase steadily over 25 years from around 330 euros to around 520 euros.

How much can a plot purchased with a loan cost over 25 years?

Few people can afford to buy a plot of land for 100,000 euros without a loan. The cost of the loan must therefore also be included in the cost of acquiring the plot.

If the entire purchase price were taken as an annuity loan with an interest rate of 3 per cent and a loan term of 25 years, the plot owner would pay approximately 43,000 euros in interest costs on top of the plot price, or a total of approximately 143,000 euros for the plot. The monthly payment for a plot loan, including both repayment and interest, would be approximately 475 euros. However, in the case of a freehold plot, the only costs directly comparable to rent are the interest costs, 43,000 euros, as loan repayments increase the owner's wealth.

In addition, annual real estate tax is paid on the land, which varies between 1.3 and 2.0 per cent depending on the municipality. There is no real estate tax on leased plots. 

Check the terms of the plot lease agreement carefully

A plot lease agreement may contain terms that differ from the most commonly used ones. Therefore, you should read the contract carefully and, if necessary, seek the help of an expert. 

In practice, agreements differ from each other in, for example, the following areas:

  • Plot lease term: The remaining lease term can vary from 20 years to up to 100 years. After the lease agreement ends, it is renegotiated, which means that the terms of the agreement, such as rent increases, may change significantly.
  • Rent determination basis: For example, the rent can be a percentage of the value of the plot, a fixed amount, or market-based.
  • Rent review interval: Rent is usually reviewed every five years, but it is worth checking this.
  • Special terms and conditions: The plot may have, for example, construction and use restrictions or redemption conditions.
  • Plot owners: The owners can be, for example, a municipality, a parish or private individuals, and each owner has their own practices.
  • Redemption of a leased plot: Nowadays, homes can also have a so-called optional leased plot. In this case, the owner can choose whether to pay monthly rent for the plot or redeem their share. 

It is important to clarify the terms of the agreement's continuity. In an extreme case, the plot owner can sell their plot for another use at the end of the contract.

Residents of city-leased plots can often redeem the plot when the lease agreement ends.

In recent years, residential property investors have favoured homes built on leased plots. An apartment purchased on a leasehold plot is often cheaper, and as a lessor, the investor can deduct the plot rental costs in taxation.

A freehold plot increases wealth

The value of the plot may increase over the years. The increase in value depends on many factors, such as how the area is developed and how land use is planned. The value of a plot of land can also decrease if, for example, the population of the area decreases.

Reselling a home on your own plot is usually easier than one on a leased plot. The exception, however, are areas where most of the homes are on leased plots. In this case, the form of ownership of the plot is not as important.

Before purchasing a plot, the buyer must comprehensively investigate all information regarding the property, such as the certificate of title, certificate of mortgages and encumbrances, planning regulations, and other documents related to the property. In addition, it is a good idea to obtain all publicly available information about the area, especially about construction and land use.

When comparing freehold and leased plots, there is one thing you should not forget: people living on leased plots cannot recover the lease payments they have made when selling their home. 

On the other hand, a person living on a freehold plot has property worth the money they have invested in the plot, the value of which can even increase over the years.

Housing finance expert Jenni Tuominen has been interviewed for the article.