Ignoring the fact that the definition of mental illness is very variable and there are a wide range of things considered mental illness I'll just focus on the example you used in the OP.
I've seen the stance in literature that schizophrenia is the complete or near inability to form a distinction between internal reality and the external, then conditions such as schizoid are milder variants where you managed it to some degree but not well enough which is supposed to explain why schizoids are rarely psychotic but prefer to live in their head/fantasise/do their own thing while maintaining a 'false self' that engages with the world.
Here we turn to Winnicott for his unique and deep insight into the schizoid state. Winnicott’s understanding was based on extensive pediatric work, experience with “severely regressed patients,” and soul-searching of his own personal condition (Rodman 2003, pp. 289–291). Like Freud, he believed that psychopathology was a manifestation of something gone awry in healthy human potential—that the abnormal could be comprehended through better understanding of the normal. Thus, Winnicott (1960) believed that the schizoid state—with its problems in relationship—has its origin in the early infant’s first attempt to relate itself to the “maternal environment.” He describes this as the “gesture” that, as a “spontaneous impulse” from the True Self, needs to be met by a receptive, non-intrusive mother, thus encouraging the infant’s further exploration into “Not-Me” space (pp. 144–146). [This explication of the infant’s first distinction between inner and outer “worlds,” self and other, is reinforced by Mahler et al.’s (1975) pediatric observations of what she calls the “differentiation subphase” of early human growth (pp. 52–64)].
When the infant’s spontaneous gesture is not well enough received, distinction between the subjective reality of the self and objective outer reality is unsure. The schizophrenic significantly fails to master this crucial developmental task. The schizoid personality, however, has been able to make a workable differentiation, but not securely. Depending on the degree to which the early experience has been wanting, the schizoid personality will regard the separateness of inside and out, self and other as a risky business. Winnicott, it should be noted, although he tends toward an inclusive description of the origin of schizoid states, clearly distinguishes between schizophrenia and characterological forms of the schizoid condition.
I think the range of experiences are somewhat like what psychedelics do in that they seem to dissolve mental/ego boundaries and cause you to identify with objects outside of yourself, and that's probably why various schizo-spectrum disorders involve feeling like you're being psychically invaded or people can take stuff from your mind or are controlling you and things in the environment have specific and special relevance to you etc.
Also I'm really tired right now so this post isn't very good. Yeah I have to go to bed so I can't listen to all of that also probably wouldn't anyway, I notice he brought up Ronald Lang at the beginning who wrote The Divided Self. I have read various parts of that before.