Is an approval in principle legally binding?

Generally not. It is written as a statement that the bank expects to lend on stated terms if conditions are met, and it usually says it is not an offer. The bank can reduce or withdraw it if the valuation, its checks or the borrower's circumstances do not support the loan. The commitment comes with the formal offer or facility letter, which still has its own conditions before money is advanced.

How long does an in-principle approval last?

It depends on the bank and the product, and the letter states it. Home-loan pre-approvals commonly run for about three months in New Zealand and three to six months in Australia; business approvals may be shorter where the bank's view depends on recent accounts. After expiry the bank will usually want updated information and may reassess the amount, so a borrower whose purchase is delayed asks for an extension in writing.

Can a bank refuse a loan after an approval in principle?

Yes. If the valuation comes in low, the borrower's income or trading changes, the checks raise concerns or the documents cannot be agreed, the bank may lend less or decline. That is what the conditions are for. A buyer who has already signed an unconditional purchase then has to fund the gap from elsewhere or risk defaulting on the purchase.

Should I bid at auction with only an in-principle approval?

Only knowing what it leaves open. A winning bid at a traditional auction commonly binds without a finance condition, while the approval still depends on the bank's valuation and final checks. A bidder can ask the bank to value before the auction, set a top bid it can fund if the valuation is lower, and keep enough of its own money to cover that gap.

// WORKED EXAMPLEWHAT THE LETTER DOES

In-Principle Approval: What It Commits a Bank To

A yes with conditions is a yes to the conditions.

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED 2026-11-07

// THE SHORT ANSWER

An in-principle approval tells a borrower how far a bank is prepared to go before it has done the work that would bind it. The bank has looked at the borrower and the proposal, and says it expects to lend a stated amount on stated terms. What it has not yet done is value the asset, finish its checks, obtain final credit sign-off or agree documents. The approval is useful for making an offer or showing a seller that funding is likely. Its value lies in reading which of its conditions could still change the answer, and when it expires.

BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.

// MAKE THE CALL

Issue 10 — The Dissent. The paper recommends approval. You found the hole. You're the third vote of five — and the RM outranks you. Your call first, then the senior banker's.

Read the file →

// 01 — WHY BANKS GIVE A CONDITIONAL YES

A buyer of a property or a business often has to show it can pay before the bank has everything it needs to decide. A seller wants to know the bidder is real; an auctioneer wants bidders who can settle; a vendor of a business wants to deal with the buyer most likely to complete. The bank, for its part, does not want to spend a valuer's fee and a credit officer's week on a purchase that may not go ahead. The in-principle approval sits between the two: enough assessment to give a figure, not enough to commit to it.

The names vary. Banks in New Zealand and Australia commonly call it pre-approval or conditional approval; in the UK, an agreement or decision in principle. In business lending the same function is often served by an indicative offer or a term sheet marked as subject to credit approval. Whatever the label, the reader's question is the same: what must still happen before the bank is bound?

// 02 — WHAT THE CONDITIONS USUALLY ARE

The conditions fall into four groups. The asset: a valuation satisfactory to the bank, often with the loan capped at a share of the lower of the price and the valuation. The borrower: final credit approval, and no material change in its finances before the formal offer. The checks: identity and anti-money-laundering requirements, due diligence on the business or title, insurance. And the documents: a facility letter or loan agreement, security, guarantees and the conditions precedent they set.

Each condition is a point at which the bank can lower the amount, change the terms or decline. Approvals also carry an expiry date, often a few months, after which the bank will want to look again. The bank's commitment arrives with the formal offer or facility letter, and even then drawdown depends on its conditions being met.

// 03 — THE EXAMPLE

A commercial upholsterer, constructed for this page like every figure in it, wants the warehouse next to its workshop, which is going to auction. Its bank gives an in-principle approval for up to US$2.4m, valid for 90 days, at no more than 65% of the lower of the price and a bank-approved valuation, subject to valuation, final credit approval and documents. The 65% is the example's, not a market norm.

The upholsterer bids and wins at US$3.6m. At a traditional auction the winning bid commonly binds on the fall of the hammer, with no finance condition, so the purchase is now unconditional. The bank orders its valuation, which comes back at US$3.2m.

Loan the buyer expected: 65% × 3,600,000 = 2,340,000

Loan the bank will offer: 65% × 3,200,000 = 2,080,000

Price 3,600,000

Loan offered − 2,080,000

Equity the buyer must find 1,520,000

Equity it had planned 1,260,000

Shortfall to fund before settlement 260,000

The approval said up to US$2.4m, and the bank has kept to its terms: 65% of the lower figure. The buyer read the headline, not the condition. Had it also lost its largest contract between the approval and the auction, the final credit approval could have reduced the loan further, or ended it. The approval was conditional on precisely the facts that changed.

// 04 — HOW IT DIFFERS FROM A FORMAL OFFER

The nearest neighbour is the formal offer: the facility letter or letter of offer issued after credit approval, valuation and checks. That document binds the bank to lend once its conditions are met and the borrower accepts. An in-principle approval generally does not bind, and is worded so that it does not.

At the other end of the range sits certain funds, used in some acquisitions: the lenders agree, by the time the buyer signs, to fund unless a short list of events occurs. That is a commitment bought in advance and paid for in fees. An in-principle approval is a free indication, which is why it carries conditions a certain-funds commitment would not.

DEFINED IN ONE PARAGRAPH → · HOW BANKS APPROVE BUSINESS LOANS → · READING YOUR FACILITY LETTER →

// 05 — WHERE IT DECIDES A FILE

For the borrower, it decides when to go unconditional. A buyer signing a conditional agreement can make it subject to finance and keep the condition until the formal offer arrives. A buyer at auction cannot, and carries every condition in the approval itself. A borrower with a deposit thinner than the gap a lower valuation would open is bidding on the bank's valuation, not its own.

For the bank, it decides how much has to be right before the letter goes out. A relationship manager who issues an approval the credit function later cuts has a customer who acted on it. That is why many banks route in-principle approvals through credit, state the conditions plainly, and say in the letter that it is not an offer to lend.

// SOURCES

The documents the statements on this page rest on. Each was opened and checked when cited.

NSW Government, Getting conditional home loan approval (nsw.gov.au) — States for home loans in New South Wales that pre-approval is not a guarantee of a loan, that full approval needs a more detailed application including a valuation, and that pre-approval lasts about three to six months — sections 02 and the FAQ.
Real Estate Authority (New Zealand Government), Settled.govt.nz — Confirming your finances — States for New Zealand home buyers that lenders usually need property information, such as a valuation and the signed agreement, before confirming a loan given conditional pre-approval — sections 02 and 05.

// QUESTIONS PEOPLE ASK

Is an approval in principle legally binding?: Generally not. It is written as a statement that the bank expects to lend on stated terms if conditions are met, and it usually says it is not an offer. The bank can reduce or withdraw it if the valuation, its checks or the borrower's circumstances do not support the loan. The commitment comes with the formal offer or facility letter, which still has its own conditions before money is advanced.
How long does an in-principle approval last?: It depends on the bank and the product, and the letter states it. Home-loan pre-approvals commonly run for about three months in New Zealand and three to six months in Australia; business approvals may be shorter where the bank's view depends on recent accounts. After expiry the bank will usually want updated information and may reassess the amount, so a borrower whose purchase is delayed asks for an extension in writing.
Can a bank refuse a loan after an approval in principle?: Yes. If the valuation comes in low, the borrower's income or trading changes, the checks raise concerns or the documents cannot be agreed, the bank may lend less or decline. That is what the conditions are for. A buyer who has already signed an unconditional purchase then has to fund the gap from elsewhere or risk defaulting on the purchase.
Should I bid at auction with only an in-principle approval?: Only knowing what it leaves open. A winning bid at a traditional auction commonly binds without a finance condition, while the approval still depends on the bank's valuation and final checks. A bidder can ask the bank to value before the auction, set a top bid it can fund if the valuation is lower, and keep enough of its own money to cover that gap.

THE IN-TRAY · ONE MINUTE

Make the call on one file.

A short file on the ground this page covers. Every option opens with how far it sits from a senior banker’s read.

THE CALL · CHAPTER 1

A five-year loan to a single-site manufacturer. No financial covenants. Security is specialised plant that only a handful of buyers could use. The credit is strong today.

Which question has the file left open?

5 MORE ON CHAPTER 1 · THE THREE QUESTIONS →WHERE DO YOU READ FROM? THE PLACEMENT →

THE GLOSSARYIN ONE PARAGRAPHIn-principle approval (approval in principle) What is an in-principle approval from a bank, and what does it commit the bank to?