How Reliable is a Mortgage in Principle?

Getting a mortgage in principle (MIP) can feel like an important first step when looking to buy a property. This document from a lender indicates that they would likely lend you the amount you need, subject to a full application. However, many hopeful buyers have seen their in principle offers withdrawn down the line. So how reliable are these early agreements really?

What Factors Determine If Lenders Honor a Mortgage in Principle?

Several key factors play into whether a lender ultimately approves the loan amount initially stated in a MIP:

Interest Rates

  • Rates offered in the MIP assume current conditions when first assessed
  • If interest rates rise significantly by completion time, the amount you can borrow often drops
  • This depends partly on the type of mortgage product selected

For example, data from UK Finance showed the average two-year fixed mortgage rate:

MonthAverage Rate
January 20222.34%
January 20234.75%

Such a steep incline can reduce purchasing power.

Learn How Much You Can Afford on Your Mortgage

Ongoing Affordability Checks

  • Lenders reassess affordability when processing full applications
  • Income verification, expenditure, credit reports all scrutinized
  • Even small changes can impact amount qualified to borrow

Per Financial Conduct Authority rules, assessments must consider surplus income, credit history, score, and committed outgoings. If these alter slightly between the MIP and formal application stage, previously offered amounts can be changed or withdrawn.

Evolving Lending Criteria

  • Banks and building societies often tighten criteria
  • For example, requiring higher credit scores or income
  • Tougher rules decrease amounts issued in MIPs

Nationwide Building Society introduced stricter affordability rules in December 2022. Their MIPs now assess borrowers can afford rates of at least 7% to ensure resilience if market conditions shift. Tighter lending benchmarks like this across the industry impact reliability.

Discover Why First-Time Buyers Should Consider New Builds

Case Studies Showing Mortgage in Principle Unreliability

Many homebuyers have experienced firsthand how early mortgage agreements failed to translate into finalized loans. Two examples demonstrating the potential unreliability:

Mortgage in Principle

Rabia from BBC’s Question Time

A 2022 episode of Question Time featured an audience member named Rabia. She explained receiving a MIP of £400,000, but just before completion her lender suddenly withdrew their offer without explanation.

Rabia had already sold her existing home relying upon this in principle amount. This demonstrates the risk of depending too heavily on early approvals before exchange of contracts.

Read more about First Homes Scheme

One in Ten Offers Withdrawn

Data from Twenty7Tec, a broker software provider, revealed 10% of mortgage offers were withdrawn in Q3 and Q4 2022. This indicates how frequently in principle amounts fail to materialize into actual mortgages.

As their CEO explained, “Lenders are having to reassess affordability and valuations much later in the process.” This often means reducing or retracting offers entirely.

Government Schemes Also Undermine Reliability

Various government initiatives aimed at assisting homebuyers have impacted reliability of MIPs:

Help to Buy Scheme Ending

The Help to Buy equity loan scheme from the government closed to new applicants in October 2022. Prior to its ending, MIPs assumed buyers would have this extra funding. Its cessation means some offers are no longer feasible without the additional support.

Mortgage Guarantee Scheme Changes

This government scheme helps lenders provide mortgages to buyers with just 5% deposits. Initially it guaranteed 15% of losses, but this was reduced to 10% in December 2022. This translates into reduced lending and lower MIP offers for those relying on the guarantee.

Read more about How Long After A Viewing Should You Expect An Offer

Steps Applicants Can Take

While mortgage in principle documents have risks, buyers can take proactive measures to ensure reliability:

  • Compare rates frequently as they continue fluctuating
  • Consult brokers to identify best lenders for your situation
  • Prepare necessary paperwork quickly before agreed amounts change
  • Treat early agreements as tentative estimates rather than guarantees

Having realistic expectations around offers changing can help avoid major issues down the line.

The Verdict: Useful Guidance but No Guarantee

In summary, while mortgage in principle offers provide an initial indication of potential borrowing capacity, applicants should be cautious about depending too heavily upon them. As interest rates, affordability criteria, and lending rules evolve, early approvals often prove unreliable rather than being set in stone.

Treat any early estimates as useful guidance during the home search, but recognize they come with no guarantee. With prudent financial preparation and prompt document submission, buyers can boost their chances of turning in principle agreements into actual mortgage loans. But some fluctuation between initial pre-approvals and final loan completion should be expected in today’s changeable market.

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