We get how getting on the property ladder feels at first. It’s obviously exciting, but the sheer number of steps and unfamiliar terms is complicated and you’re not going to find it easy. Looking at property listings and dreaming about locations is the fun part, but it won’t be long until you hit a wall of financial jargon.
One of the first and most important terms you’ll encounter is the ‘mortgage in principle’. So, what is a mortgage in principle? Put simply, it’s essentially a document that makes you go from a window shopper into someone who is legitimately ready to purchase a home.
This first initial step is a bit complicated but you need to understand how it works to get far in the home buying experience.
So, throughout this article, we’re going to break down:
- Exactly what it is
- Why it matters so much
- How you can get one
- What Upscore can do to help
Understanding The Basics First
A mortgage in principle is known by a few different names, which definitely adds a bit to the confusion. You might hear it called an agreement in principle (AIP) or a decision in principle (DIP).
That said, the function is exactly the same regardless of what you may have heard it being called. It’s basically just a formal statement from a lender or bank that confirms that they are, in principle, willing to lend you a certain amount of money to buy a home.
It’s not a legally binding contract or a guaranteed mortgage offer or anything. Instead, it’s just a strong indication of your borrowing power that’s based on an initial look at your finances. A lender will take a look at your income and your spending before they run a preliminary credit check to arrive at a figure.
Now this figure isn’t just plucked out of thin air; it’s a calculated estimate that gives you a solid foundation for your property search. This document essentially serves as a mortgage promise, conditional on your financial circumstances remaining the same and the property you choose meeting the lender’s criteria.
Why It’s a Non-Negotiable First Step
Getting an agreement in principle before you start seriously viewing properties is always the best move – especially if the property you’re looking at is in high demand. When you walk into a viewing or speak to an estate agent with an AIP in hand, it changes the conversation entirely.
It shows you’ve done your homework and are a credible buyer rather than someone who’s just looking around and not really ready to commit to anything major. Sellers are more likely to take your offer seriously if they know you have the financial backing ready to go.
Even outside of the obvious credibility benefit, you’re also getting a realistic budget from having one of these. It’s easy to get swept up in looking at properties that are just outside your price range. But the whole point of an AIP is to ground your search in reality. It tells you precisely what you can afford, which means you can focus your energy on homes within your budget.
It’s not exactly uncommon to fall in love with a place you simply can’t secure a loan for, so this is a great way of avoiding that pain. It also prepares you for the next stage, the full mortgage application, because you’ve already completed the preliminary work.
How to Get Your Agreement in Principle
The process of applying for a mortgage in principle is thankfully quite straightforward and much quicker than the full application that comes later. Many lenders now allow you to apply online, so it’s way more convenient than how it used to be. You can also work directly with a mortgage broker, who can search the market for you and find the best potential deals for your circumstances.
To assess your financial situation, the lender will need some key information. You’ll typically be asked to provide details about your:
- Income (including your salary and any other regular earnings
- Existing loan repayments
- Credit card debt
- Household bolls
- Recent bank statements
- Payslips
The lender needs a clear picture of what comes in and what goes out each month to determine how much you can comfortably repay. This is all part of their initial credit checks to see if you’re a reliable borrower.
Will It Hurt My Rating?
This is one of the most common worries people have, and it’s fair enough. Will getting a mortgage in principle affect my credit score? The short answer is, usually not. Most lenders use what is called a soft credit check for an agreement in principle.
A soft credit check is a top-level review of your credit file that is not even visible to other lenders. It gives the lender the information they need without leaving a hard footprint on your report. It won’t affect your credit rating in a negative way.
This is a key difference from the full mortgage application later in the process, which does require the opposite: a ‘hard’ credit check. A hard check is a deep dive into your credit history and is recorded on your file. Having too many hard checks in a short period can sometimes lower your credit score, as it might look like you’re desperately seeking credit.
This is why the soft check for an AIP is so valuable; it allows you to shop around and get an idea of your borrowing power without any negative impact. You can confidently find out what you can borrow, and it won’t affect my credit score, which is a huge relief for many prospective buyers.
You Have Your AIP. Now What?
Once the lender has reviewed your information, they’ll issue your decision in principle. So, how long does a mortgage in principle last? Typically, an AIP is valid for a set period, which is usually around 90 days. This gives you a three-month window to find a property and have an offer accepted.
But make sure you keep in mind that the AIP is conditional. The final mortgage offer depends on a successful full application, where the lender will have to verify all your information again and conduct a valuation of the property you want to buy.
So that means that if your financial situation changes for the worse during those 90 days – for instance, if you change jobs or take out a large car loan – your lender could revise or even withdraw their offer.
Because of this, we’d always recommend that you try to maintain a stable financial profile from the moment you get your AIP to the day you get the keys. Your AIP is essentially your foot in the door for the serious part of the home buying process.
How Upscore Can Help
Is your dream home a little further afield than Australia? Many professionals and remote workers are now looking to invest in property in Europe or the UK.
Our Finance Passport connects you with multiple lenders across different countries – it can still help with Australian properties, too – and allows you to compare deals and apply remotely, all with personalised support.
