When looking at applying for a mortgage, it can be quite complicated. There will likely be lots of new terminology and documents flying around. A mortgage illustration and a Mortgage in principle will be 2 of them. Lets have a look at what these documents are and where they differ…
What is a Mortgage illustration?
A Mortgage illustration is in essence a quote. It is not legally binding, it is indicative numbers to help you look at the cost of obtaining the mortgage and some important information regarding the specific mortgage product.
All Mortgage Illustrations follow the same format, it is called a “European Standardised Information Sheet” or ESIS for short. However, some older brokers may also call it a KFI – which was the old name for them.
I think the most important sections of an illustration are:
Section 3 – Which explains the main features of the mortgage. The mortgage amount, the initial interest rate, how long the initial rate is for and what happens after the initial period.
Section 4 – The fees. Broker fees, lender fees, valuation etc.
Section 6 – The monthly repayments.
Section 9 – Flexible features. This could be overpayments, it could be mentioning cashback or freebies (most likely a free valuation).
Basically an illustration is just a breakdown of the mortgage product you are applying for similar to if you were get a quote from a builder for example.
What is a Mortgage in principle?
A mortgage in principle (MIP), also known as a Decision in Principle (DIP) or an Agreement in Principle (AIP). All 3 (or 6 if you are using the acronyms) are exactly the same thing.
A Mortgage in principle means that with the information provided to the lender and the credit check carried out, you were eligible for the mortgage at the time.
However, I think it is important to understand that a Mortgage in principle:
- Is not a mortgage offer – you still need to make a full application and go through the underwriting.
- Validity – although they say they are valid for maybe 30 days, if you were to take out a lot of credit the next day it miss some payments, it may no longer be valid.
- It is only as accurate as the information entered on the DIP form. If the information is entered incorrectly or not as the mortgage lender would like – for example, some lenders may only accept half of bonus payments. If you have put the full figure down, that may skew the results.
Are illustration and Mortgage in principle documents the same?
In a word, no.
The Mortgage in Principle (MIP) – is an intention to lend based on the information submitted. Most also involve a credit check before they are issued and a basic affordability check. This is issued by a mortgage lender and theoretically may cover most or all of their products. There are exceptions, but I think that gets quite complex and would be a post in itself.
The illustration – is a break down of that particular mortgage product. Where the MIP may cover any product that lender has. The illustration drills right down to one specific product that you or the broker has selected to apply for.