What is an agreement in principle?

Agreements in principle (AiP) are critical if you’re looking to buy a house. They give you a clear idea of your buying price range and demonstrate to the estate agent that you are serious about purchasing. They’re also a forerunner to being accepted for a mortgage and they can make the whole process of house hunting from initial search to making an offer so much smoother. There are a few things to consider when you first start on your house buying journey, so it can become tricky trying to prioritise and fit everything in around your already busy life. Making sure you are prepared and getting certain things like an agreement in principle out of the way early on can make the viewing process much less stressful as you’ll know which properties you can afford and how much of a deposit you’ll need.

Definition of Agreement in Principle

There is no specific definition of an agreement in principle, but it is nationally regarded as the steppingstone to your mortgage contract and may also be known as a “mortgage in principle” or a “decision in principle”. Agreements in principle don’t just have to be associated with mortgages, they can outline the groundwork of a contract in any industry.

Why do you need an agreement in principle?

We’ve covered the main reasons you need an AiP above, but it can’t be said enough: if you want to buy a house, it’s helpful to have an agreement in principle. Depending on where you are in your house hunting journey, the requirement for an AiP will vary. If you’re only just starting to think about moving, or you’re coming up to having your full deposit ready as a first time buyer, you probably don’t need to get too excited about an agreement in principle just yet. AiPs are typically valid for three months, so there’s little point applying for one if you aren’t intending to buy for another six months.

Once you get serious about moving – maybe you’ve decided now’s the time to fly the nest or perhaps your family is expanding in the near future, and you need extra space – you want to start looking around to get an idea of how much you can borrow. You can use online calculators for this, and most banks have one on their website: you can play around with the amount you need to borrow and how much of a deposit you’ve got. If you’re moving house, remember that the normal moving fees will come out of any equity you’ve built up in your current house (unless you have saved separately for this).

If you’re at the stage of booking some viewings, it’s a good time to apply for an agreement in principle. While you could do this at a later stage, if you view a property that you really like, you’ll want to get moving quickly so having an agreement in principle ready means you can start the purchase process much sooner. Once you have an agreement in principle, you can usually renew it fairly easily if it expires before you’ve found your ideal home. If your circumstances have changed at all, you’ll need to apply for a new agreement in principle or at least notify the bank, because if your circumstances are different from when you applied for your AiP, you may come across a few small issues when applying for your mortgage. You don’t have to take a mortgage with the same bank you have your AiP with, though if you do have a preference, it might be worth trying to stick with one bank through the whole process. However, don’t miss out on a better mortgage deal elsewhere just because of your agreement in principle! You need to research thoroughly and although you may not normally use brokers for other kinds of borrowing, mortgage brokers can often get you a much better deal than you may be able to find independently.

While looking for your new home…

As well as the standard house-hunting procedures, you may want to consider how your lifestyle could affect your ability to be approved for a mortgage. While your mortgage advisor will be able to offer specific advice for your circumstances, there are some general things to get thinking about:

Your use of credit

This includes car finance, online loans and even your overdraft and credit card usage! Mortgages are a form of borrowing and lenders have to make sure that lending to you is responsible. If a large portion of your income is already committed to repaying other creditors, it could affect your mortgage application.

How you budget

Similar to how you use credit, your budgeting skills could impact your chances of mortgage approval. Consider how you could improve your budget to free up additional funds each month to show you have sufficient disposable income to cover any potential cashflow shortfall. This may mean reducing the leisure spending for a few months or diverting funds into a rainy day savings account instead.

Your credit file

Kind of linked to how you use credit, your credit history will play a big role in your mortgage application. There are things you can do to improve your credit file, from registering on the electoral register to closing old credit accounts you no longer use. If you’re planning to buy even in the next five years, now is a good time to check your credit report and start increasing your credit score.

Buying a house is very exciting at any stage, so make sure you’re fully prepared to avoid unnecessary delays or disappointment. Getting an agreement in principle at the right time could make all the difference when you find your perfect new home!