You’ll find any number of online mortgage calculators on the websites of lenders, price comparison companies, mortgage brokers and so on. However, it’s worth remembering that these can only ever give a ballpark figure and are an illustrative tool only.
The actual amount you will be able to borrow as a first time buyer will be based on a wide range of factors including your credit rating, income, existing credit commitments and employment circumstances. To get a more accurate assessment of how much you are likely to be able to borrow, it’s usually a good idea to get a “mortgage in principle”.
Applying for a mortgage in principle
You may find the mortgage in principle referred to by other terms such as “agreement in principle”, “decision in principle”, or even by a brand-specific name such as Halifax’s “Mortgage Promise”. Whatever they call it, the meaning is the same: a mortgage in principle is an initial agreement that the lender is prepared to grant you a mortgage, and a qualified declaration of how much they will let you borrow.
The mortgage in principle is based on the initial personal details you provide about your employment status, income, how much you want to borrow and other factors, in combination with a credit check run against one of the UK credit reference agencies. Based on this information, the lender can make an initial decision about your creditworthiness and provide an agreement in principle stating how much they would be willing to lend you.
Is it a guarantee?
It’s extremely important to remember that the mortgage in principle isn’t legally binding and is not an absolute guarantee of how much you can borrow, or even that your mortgage application will definitely be approved.
While it is a good indication of whether you’ll be able to get a mortgage, it is based on a credit score worked out on only a limited amount of information.
When you go on to make a full mortgage application, there will be a much more thorough assessment of affordability and your personal circumstances, including income verification. Although it’s unusual, you may also find that lending criteria change between receiving your mortgage in principle and proceeding to a full application.
In some situations the amount you can borrow may even change due to the type of property you decide you want to buy – some lenders require a bigger deposit on properties of non-standard construction, for example.
The pros and cons
In addition to the fact that a mortgage in principle isn’t guaranteed, it’s also important to be aware that when you apply for one the lender will perform a credit search, which leaves a “footprint” on your credit record. While this isn’t usually a problem, you should think carefully before asking for multiple agreements in principle from different lenders – a large number of credit searches on your record within a short period can actually affect your credit rating.
That said, the advantages of gaining a mortgage in principle generally outweigh any drawbacks. As well as providing you with a degree of peace of mind about how much you can borrow, it gives sellers and estate agents the confidence that you are creditworthy.
It shows that you have taken steps to secure a mortgage, and this may even give you greater negotiating power when discussing purchase price, compared to other potential buyers who haven’t obtained a mortgage in principle.
To work out what you could borrow with a mortgage in principle, talk to a mortgage advisor.
Updated February 2020