Agreement in Principle

If you are funding your purchase with a mortgage, then the first step is to contact your bank or a mortgage broker and arrange to be sent an Agreement in Principle (or a Decision in Principle). This is a written statement from a bank which confirms they are willing to lend you funds (subject to certain criteria being met) and states how much they are willing to give you based on your income. Just so that it is clear, the bank will always state how much money they will give you and this would be about 90% of your intended purchase price. So remember to then add on your saved deposit to find out how much your total budget is. For example, if your Agreement in Principle states that the bank would lend you £200,000, this represents about 90% of your budget and if you have £20,000 saved for a deposit then you can be looking for properties within the price range of £220,000. At this stage, this is only based on your income and not on a specific property.

NOTE: If you provide false, incomplete or incorrect information to your bank or your mortgage broker at this stage, you may risk the bank changing their offer later on and either lending you less than stated on the Agreement in Principle or withdrawing from lending you completely. Incorrect or incomplete information will most probably delay your mortgage application which in turn will delay your purchase.

If you wish to know instantly how much a bank would be prepared to lend you, you can use their online calculators for this purpose.

Please find below the links to those by HSBC and Barclays as an example:

HSBC mortgage calculator

Barclays mortgage calculator

 

In order for the Agreement in Principle to be issued, the banks will need the following information:

• How many people are applying for the mortgage
• What is their income from employment
• What is their income from self-employment 
• What are their current liabilities such as student loans, personal loans, credit cards balance, overdraft amount, hire purchases, current rent and so on
• Current payments for child support or child care

Sometimes estate agents would require to see your Agreement in Principle before arranging to show you a property. 

The reason for this is so that they can filter the buyers who have already taken active steps to arrange their financing from those who are yet to look into this.

The Agreement in Principle is not binding so you may choose a different bank to take out your mortgage from than the one which gave you the Agreement in Principle. Bear in mind however, that each bank would do a soft check on your credit file before issuing an Agreement in Principle so too many of these may negatively impact your credit score.

What do you not know about the mortgages:

• Many banks now offer 95% financing so you only need to have a 5% deposit. This means that with £10,000 in savings you could be looking to buy a property for £200,000 or share of a property of higher value.
• Many banks only require proof of income (payslips) from the last three months if you are employed and two completed financial year accounts if you are self-employed or have a limited company
• Your credit score does not affect the bank’s decision as to whether to lend you or not – it only affects the interest rate they will offer you.  A full time income is more important for them. 
• High street banks will probably not lend you money if you have adverse entries on your credit history however there are specialist lenders who will, but on a higher interest rate.
• If you have a second source of income, this would increase the amount the banks would lend you, however if this is seasonal or temporary work then it will not be taken into account.
• The more deposit you have (as a percentage from the full value of the property) the lower the interest rate on the mortgage will be.

Using a mortgage adviser is entirely optional and those who have a low credit score, gifted deposit, irregular or low income, have changed type of employment and so on would benefit more from such a professional. 

Independent mortgage advisers have access to all banks and financial institutions who offer residential mortgages (including specialist ones you may not have heard of) so they will be able to advise you what bank offers the most suitable terms for your personal circumstances as well as what bank would be willing to lend you if high street banks are refusing. The information they will need from you is in relation to your income and expenses. Based on this they will check what lenders would offer you a mortgage on the best terms.