Agreement in Principle: What It Means for a Commercial Mortgage Application

What is an agreement in principle?

Before committing to a commercial property purchase, it can help to know roughly how much a lender is likely to offer. An agreement in principle, sometimes called a decision in principle, does exactly that: based on the details provided, a lender gives an early indication of the commercial mortgage amount it would likely be willing to lend, subject to full verification later in the process.

It isn't a binding commitment, and the final mortgage offer can still differ once the lender has completed a full assessment. But it gives a business a realistic starting figure to work from, as well as potentially carrying real weight when it comes to demonstrating serious intent to a seller or agent.

Step 1: Gather the basic business and financial details

Lenders will typically ask for an overview of the business itself, along with its financial position, to form an initial view. This generally includes the business's trading history, recent turnover, and details of any existing borrowing or financial commitments.

Step 2: Provide a picture of the property and the purchase

Details of the property being considered, and how it will be used, play into the assessment. A lender will want to understand whether the property is intended for the business's own use, for investment, or a mix of the two, as this can affect both the amount offered and the terms available.

Step 3: Undergo an initial credit check

Most lenders will run a credit check on the business, and often on the directors involved, as part of forming their initial view. This is usually a lighter check than the one carried out during a full application, though it's worth confirming with the lender exactly what's involved before proceeding.

Step 4: Receive the agreement in principle

Once the lender has reviewed the information provided, they'll confirm an indicative amount they'd likely be prepared to lend. This figure typically remains valid for a set period, often a matter of weeks to a few months, giving the business a window to act on it.

Step 5: Move to a full application once a property is agreed

With an agreement in principle in hand, a business can move forward with more confidence when negotiating on a property. Once a purchase is agreed, the full mortgage application follows, at which point the lender verifies everything declared earlier in detail before issuing a final offer.

Things to consider with an agreement in principle

It isn't a guaranteed offer: The final amount can still change once the lender carries out a full assessment, particularly if anything declared earlier doesn't hold up under closer scrutiny.

Accuracy matters: Understating costs or overstating income at this stage can lead to an agreement in principle that doesn't reflect what the business can realistically expect further down the line.

It's tied to a specific lender: An agreement in principle from one lender doesn't necessarily reflect what another might offer, so it's worth being confident in the choice of lender before relying on the figure too heavily.

Multiple applications can raise questions: Approaching several lenders for an agreement in principle in a short space of time may prompt questions later in the process, so it's generally worth being selective from the outset.

It has a shelf life: Agreements in principle are usually only valid for a limited period, so timing matters if a property search is expected to take a while.

Why speak to a broker before applying?

Because an agreement in principle is tied to a specific lender's criteria, getting the details right from the outset, and approaching the right lender for the business's circumstances, can make a meaningful difference to the outcome. A broker with access to a wide panel can help identify lenders more likely to look favourably on a business's profile, as well as help make sure the figures put forward are accurate and well-supported from the start.

MAF Finance Group can compare offerings from a wide range of banks and alternative funders to help guide your business through the commercial mortgage process.

To learn more or get a quote, fill out the form below. If you'd like to speak to someone directly, call us on 0115 858 1010 and a member of our team will be happy to help.