Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.
Before you start house hunting, there are several things to consider and knowing what you can afford is key to making sure your application is successful. To be sure that you can borrow the amount of money you're likely to need, you can apply for a mortgage in principle. In this guide, we look at why you might get a mortgage agreement in principle (AIP) and how to get accepted the first time.
A mortgage agreement in principle lets you find out how much money you can borrow to buy or remortgage a property. The purpose is to show that you can, in theory, borrow a certain amount from a lender. This can help in the process of house hunting, especially as some estate agents will insist that you have an agreement in principle before allowing you to view properties.
Keep in mind that when you get a mortgage in principle, there is no commitment from the lender that they will let you borrow that much. The agreement in principle doesn’t constitute a mortgage promise, it is simply an indication of how much you could borrow. You will still need to go through the mortgage application process for an official mortgage offer.
Getting a mortgage in principle is relatively simple and lenders require just a few key pieces of information about your personal circumstances. You will likely need to provide:
your name and date of birth
your address history going back three years
your monthly expenses
the size of your deposit
You will not need to provide evidence or supporting documentation at this stage. However, you will need to do so if and when you apply for a mortgage.
You can often get a mortgage in principle in less than an hour if you have all the information required at your fingertips. Most lenders will allow you to apply online.
Before getting a mortgage in principle, gather details about your income and expenses, along with address history and other personal information. Although you are unlikely to need the full documentation required for a mortgage application, it can be helpful to be prepared with paperwork ahead of time.
You’ll need the documents anyway, when you decide to apply for a mortgage properly.
Once you have the agreement in principle, it is usually valid for around 90 days. The idea is that it gives you an indication of what you might be able to afford and enough time to look at available properties in your price range.
If it takes you a while to find a property you want to buy, you might find that the interest rates have changed from when the mortgage in principle was provided, or there may be different mortgage deals on the market.
If you do decide to apply for a mortgage, your lender may be able to use the information you provided when you got your agreement in principle, but they will still need to update your details and check that your personal circumstances have not changed. You will also need supporting documentation to prove your income.
Most agreements in principle are provided free of charge, but some brokers may charge a fee so check first.
Whether or not your mortgage in principle affects your credit score will depend on whether the lender providing your agreement runs a hard or soft credit check. It is important to know ahead of applying which type of check the lender will use, as hard credit checks leave a footprint on your credit file.
Too many hard searches in a short period of time can cause your rating to drop and impact your chances of being accepted when you make a full mortgage application. If you can, choose a lender that only runs soft searches to give agreements in principle.
Find a mortgage lender to approach for an agreement in principle. AIPs are usually provided free of charge, but it’s wise to check first. You can use a broker who will suggest a lender that is suitable for your needs.
Check whether the lender or adviser will use a soft or hard check as too many hard checks can affect your credit score. Where possible, use a lender that does soft searches only.
Gather basic personal details, as well as information on your income and expenditure. Locate documents like proof of salary – they may not be needed at this stage, but it can be useful to have it to hand.
If you're happy to proceed, start your application. Don’t worry about going into great detail about your income and expenditure – you only need to do that for a full mortgage application.
Be prepared for the adviser or lender to take a few minutes to get extra information.
Be patient. In some cases, lenders or mortgage advisers need more details and documents. If they do, they should get back to you within 24 hours.
A mortgage in principle is an indication of how much a lender might offer you. There’s no guarantee, and you may find that once you submit a formal mortgage application you are offered a different amount or different terms. You can use it to make an offer on a home, but you’ll need a full mortgage before you can proceed.
A mortgage offer means that the lender has officially confirmed it will lend you a specific amount of money for a property. This is based on a review of your finances and supporting documentation. You’ll need to apply and the lenders will carry out affordability checks and value the property.
Once you have an idea of how much you can borrow and you’re ready to apply for a mortgage, you need to find the best mortgage deal for you. To do this, you should compare a range of deals on the market. You may also wish to work with a broker who can advise on which lenders will consider you and the best deal for your circumstances.
Remember to check the overall cost of borrowing, rather than being led by the cheapest rate. Take note of additional charges, including set-up costs and exit fees.
When weighing up the best mortgage deal for you, you should consider:
the interest rate and how long it applies
the type of rate: fixed, discounted or variable
what the rate will be at the end of the deal’s term
overhanging penalties from extended tie-in terms
whether you’re allowed to overpay and by how much
the term of the mortgage you’re offered (25 years is standard)
whether fees will be added to your mortgage (if they are, you’ll pay interest on them)
While this list is not exhaustive, it gives a good idea of the kind of areas you need to consider.