For your typical first-time buyer, receiving a mortgage Approval in Principle (AIP) from a bank is usually a major milestone. Getting to this point might have required a few arduous weeks of meeting with a bank or broker, gathering numerous documents, signing an array of forms, and answering questions about this or that transaction — “Can you remember why you withdrew €350 euros from an ATM in Glengariff six months ago?” — so one can be forgiven for breathing a sigh of relief upon receipt of that AIP.
And rightly so: unless you are fortunate enough to be a cash buyer, getting AIP’d by a mortgage lender is a crucial step on the road to home ownership, and one that should be celebrated. However, it is only that – a step! – and to be frank, perhaps the most important words in the term Approval in Principle are the last two: ‘in principle’.
Indeed, while it sounds very official, and looks quite fancy when printed neatly on the bank’s headed paper, the AIP does not actually commit the potential lender to anything, nor does it mean that the prospective borrower can suddenly relax and start spending without a care in the world, or stop that carefully-planned savings regime, which has been in place for the last six months. All the AIP really means is that a bank has looked at an applicant’s income and savings at a specific point in time, and agreed that for a particular period (typically six months or a year, depending on the lender) they would in theory … all else being equal … but only if nothing significant changes, and the cost of living stays broadly the same … and the house being purchased is up to their standards, be willing to consider lending the money required to buy it.
This last qualification is an important one and emphasises that the mortgage assessments conducted by banks have two main targets: the applicants themselves and the property they are hoping to purchase. Bank of Ireland, for example, may think that recent applicant John, with his strong income, consistent savings, and absence of short-term debt, is the ideal candidate for a mortgage, but if he returns two months post-approval, having gone sale agreed on a ‘doer-upper’ which sits in an area prone to flooding and on land whose boundary is disputed by neighbours, his AIP won’t be worth the paper it’s printed on. Bank of Ireland, along with any other Irish mortgage lender, will be incredibly wary of this house because if they ever need to repossess it, they themselves won’t be able to easily sell it on and thus get their money back. Getting paid is ultimately what matters to the banks, understandably enough.
What an AIP ‘will’ do, however, is allow recipients to go house hunting, meaning they can view homes in their preferred area, engage with estate agents, and crucially place bids. Should they then go sale agreed on a house that the bank approves of (a valuer will be sent by the bank to assess the property), and no significant changes to the applicant’s circumstances have occurred (such as a marriage, the birth of a child, a promotion or demotion at work, or a change of employment altogether), they will be well placed to receive a Loan Offer from the bank, which is a much more meaningful document than the AIP. Also known as a Letter of Offer, this is a formal, legally binding document from a lender outlining all the mortgage’s important details, such as the term-length and interest rate, and it will also list the requirements/conditions which need to be met in order to eventually draw down the funds.
While Loan Offers do sometimes include ‘special conditions’ specific to more complicated cases, many of them will simply include the requirements typical for any mortgage, such as the need to have both home and life insurance in place for the term of the loan. Of course, even this standard small print can sometimes cause issues, namely when people belatedly discover they cannot get either home or life insurance for one reason or another. Both scenarios can be very difficult for prospective borrowers to navigate, and banks are rarely, ‘if ever’, willing to waive this condition or compromise on it. The house insurance, for example, really needs to have all the main perils — fire, flood, subsidence — covered to satisfy the bank, and there are parts of West Cork and the wider county where both flooding and subsidence have caused issues in the past. Subsidence, where there is movement of a building’s foundation caused by the loss of support from the soil beneath it, tends to be more of an issue in Cork City, but flooding has historically occurred in West Cork towns such as Skibbereen and Bandon, so if house hunting in these areas it’s worth asking yourself “will I be able to insure this home to the bank’s satisfaction?” Getting ahead of potential pitfalls like this can prevent heartbreak down the line and ease the drawdown process for all involved.
Issues with life insurance (known in broker-speak as ‘mortgage protection’) can be even harder to navigate. Once upon a time, banks were sometimes willing, in certain cases, to waive the requirement for life cover, but since the 2008 financial crisis they have become much stricter about this, as they have about many other things. Essentially, if your income is being used as part of the mortgage assessment, either as a single or joint applicant, you will ‘need’ to have life cover in place to draw down the funds, without exception. The policy will be legally assigned to the bank, meaning they essentially own a policy on your life, and this is designed to protect the lender should a mortgage holder pass away or become unable to work during the term of the mortgage.
In sum, if you are hoping to apply for a mortgage at any point in the future but also have reason to believe you may struggle to get life cover, perhaps due to an ongoing medical condition, it is worth investigating your options now, even prior to getting AIP’d. This can be done in numerous ways, but one is to speak with a life insurance expert at somewhere like Moneytree Finance – (We don’t just do mortgages you know!) — who will be advise you on the best way forward.
If you are a potential mortgage borrower and you have questions about any of the topics discussed above, please don’t hesitate to get in touch with Moneytree Finance today.
