Agreement in Principle: What Is It and Does It Guarantee a Mortgage?

If you are planning to buy a property in the UK, one of the first terms you are likely to come across is Agreement in Principle (AIP).

It may also be referred to as a Decision in Principle (DIP) or Mortgage in Principle.

Getting an AIP is an important step when preparing to buy a property. However, there is a common misconception: many people believe that once a lender has provisionally agreed to a certain amount, their mortgage is practically guaranteed.

In reality, this is not the case.

Let’s look at what an Agreement in Principle is, how it differs from a Mortgage Offer, and why the amount you can borrow may change later.

What Is an Agreement in Principle?

An Agreement in Principle is a preliminary assessment of how much a lender may potentially be willing to lend you to purchase a property.

For this initial assessment, the lender will usually consider basic information about your financial circumstances, such as:

• your income;
• employment status;
• existing loans and financial commitments;
• expected deposit;
• credit history;
• main monthly expenses.

Based on this information, the lender can provide an initial estimate of how much you may be able to borrow.

An AIP can be particularly useful before you start looking for a property because it gives you a more realistic idea of your potential budget and the price range you may want to consider.

However, it is important to remember that this is a preliminary decision, not final mortgage approval.

Does an Agreement in Principle Guarantee a Mortgage?

No.

Even if you receive an AIP for £250,000, it does not mean that the lender will definitely agree to lend you exactly £250,000 when you submit the full mortgage application.

At the Agreement in Principle stage, the lender has not yet completed a full assessment of all your documents or the property you intend to buy.

Once you find a property and submit a full mortgage application, the lender may review in more detail:

• payslips and proof of income;
• bank statements;
• credit history;
• existing financial commitments;
• source of deposit;
• type and stability of employment;
• value and characteristics of the property.

If new information becomes available during these checks, the lender’s decision may change.

Why Can the Mortgage Amount Decrease After an AIP?

One reason is a change in the applicant’s financial circumstances.

For example, after receiving an Agreement in Principle, a person may:

• reduce their working hours;
• take an extended period of leave;
• change jobs;
• take out car finance;
• apply for a new personal loan;
• increase their credit card balances;
• lose part of their regular income.

As a result, the lender’s affordability calculation may change and the amount available could be reduced.

This can be particularly important for applicants whose income varies from month to month.

For example, in our practice we had a client working under the CIS (Construction Industry Scheme). Initially, the client received an AIP for approximately £270,000.

Several months passed while the client was looking for a suitable property, and during this period they worked considerably less. When the right property was found and the lender assessed the client’s current income again, the available mortgage amount fell to approximately £220,000.

This case clearly demonstrates why an AIP should not be treated as a guarantee of the final mortgage amount.

What Is the Difference Between an Agreement in Principle and a Mortgage Offer?

The main difference is the level of assessment involved.

An Agreement in Principle is an initial indication of your potential borrowing capacity based on the information available at that time.

A Mortgage Offer is the formal mortgage offer issued by the lender after a more detailed assessment of your application and the specific property.

Between these two stages, the lender may request additional documents, verify your income and expenditure, and carry out a valuation of the property.

Even after receiving a Mortgage Offer, it is important to keep your financial circumstances as stable as possible until Completion.

Do You Need an AIP Before Looking for a Property?

An Agreement in Principle is more than just a formality.

It can help you understand what budget may be realistic for your circumstances and avoid focusing on properties that are significantly outside your estimated borrowing capacity.

In addition, when you make an offer on a property, an estate agent may ask for evidence that you have already explored your mortgage options.

However, it is important to remember that an AIP reflects your circumstances at a particular point in time.

If your income, expenses, debts or other circumstances change, the amount you may be able to borrow can also change.

What Should You Do After Getting an Agreement in Principle?

After receiving an AIP, it is advisable to keep your financial circumstances as stable as possible throughout the property-buying process.

Where possible, avoid taking out new credit, significantly increasing your debts or reducing your income. Major changes to your employment or working arrangements should also be discussed with your mortgage broker beforehand.

If your circumstances do change, it is better to tell your broker as early as possible.

This allows your mortgage options to be reassessed before you make an offer on a property based on a borrowing amount that may no longer be available.

What Should You Remember?

An Agreement in Principle is an important first step when buying a property in the UK, but it does not guarantee mortgage approval or the final amount a lender will agree to lend.

An AIP helps you estimate your potential budget, while the final decision is made after the lender completes a full assessment of your application and the property.

It is therefore best to think of an Agreement in Principle as the starting point of your mortgage journey rather than final approval.