A CIS mortgage is only available to registered sub-contractors and it allows them to use the CIS payslips as proof of pay. There are many advantages to this and usually it means that you can borrow a higher amount compared to a standard self-employed mortgage.
In this article we go through how a mortgage is calculated if you are a CIS worker.
What is a CIS mortgage?
The Construction Industry Scheme (CIS) requires registered contractors to deduct a portion of payments due to subcontractors. This amount is then forwarded to HM Revenue & Customs and serves as an advance National Insurance and income tax payment. CIS payslips are issued by the contractor, which show the gross and net payments made to the subcontractor.
A CIS mortgage allows subcontractors to use these payslips from contractors as proof of income, eliminating the need for full business accounts or an SA302. This can be advantageous for individuals who lack two years of accounts.
For a mortgage application, CIS workers usually need to provide their CIS payslips from the past 3 months. Some lenders might ask for 6+ months of payslips. Bank statements from the same period will be needed as well.
How much can you borrow?
After working out your average annual income, the lender can calculate the amount you are eligible to borrow.
Typically, a self-employed individuals’ mortgage is based on their net income in accordance with the SA302.
For an eligible CIS worker the lenders base their calculations for the maximum mortgage amount on the gross figures provided in the payslips.
This is one of the main advantages.
This way of working out your earnings allows you to qualify for a larger mortgage, when compared to using SA302 figures.
Mortgage lenders usually allow up to 4.5 times this amount to work out the maximum mortgage. However, this calculation may be affected by other financial obligations like supporting dependents, additional mortgages, loans, and credit cards. Existing financial commitments affect your affordability and need to be included within a lenders assessment.
QUICK EXAMPLE
£50,000 gross earnings per year through the CIS scheme.
Multiplying £50,000 by 4.5 equals a potential mortgage of £225,000.
All lenders have their own methods and the possible mortgage could be higher or lower.
Calculating payment based on your daily rate.
The CIS mortgage scheme enables the use of gross day rate in all calculations, as opposed to net pay. It is crucial to clarify this at the beginning of any mortgage enquiries to avoid being offered a lower amount.
The quick example above resulted in a potential mortgage amount of £225,000.
If we used the traditional SA302 method the gross income figure could be reduced to £40,000 by deducting materials and expenses.
Multiplying £40,000 by 4.5 equals a potential mortgage of just £180,000.
A reduction of £45,000!
Eligibility
Individuals working as subcontractors in the construction industry, including plumbers, carpenters, electricians, builders, decorators, and bricklayers, may be eligible if their earnings are subject to CIS deductions.
When applying for a mortgage, it is always necessary to provide proof of income.
Lenders typically require a few months of CIS statements/payslips as evidence, but subcontractors must be registered in order for these documents to be accepted as valid.
When applying for a loan, most lenders have an age requirement of 21 to 75. However, if the rest of your application satisfies their criteria, some may consider applicants who are older.
Your borrowing amount is affected by the size of your deposit and your loan-to-value (or LTV) ratio. Lenders typically prefer a 10% deposit, but may accept 5% in certain situations. A lower LTV (from a high deposit) can result in a more competitive interest rate as the lender’s exposure is reduced.
When evaluating your application, lenders will review your credit history. A clean credit history will increase your borrowing options.
How much are the monthly payments?
The cost of your monthly mortgage payments will be influenced by various factors, including the size of your deposit, the term of your mortgage, and the chosen product.
The interest rate choices for your mortgage are affected by the LTV ratio. Borrowers with lower LTV ratios are often given lower interest rates by lenders as a reward.
To get a quick idea of the monthly payments you can use our free calculator.
Advantages
One big advantage of a CIS mortgage is the ability to use the gross day rate to determine the maximum mortgage amount, which can greatly improve the loan size.
The lender won’t normally need to see self-employed accounts or SA302.
The income used will be an average of the last three months, not last tax years income.
Brokers will also have access to some exclusive deals, which are only accessible by brokers and intermediaries.
You may also like to read: Is a self-employed mortgage based on gross or net profit?
Are CIS mortgages more expensive?
Using CIS based income does not necessarily result in a higher interest rate.
Depending on your individual situation, you may be eligible for an interest rate that is similar to those available to employed individuals.
What are the options if you have bad credit?
Obtaining a CIS mortgage is feasible despite having poor credit. The impact of your credit history on your application will vary based on the particular problem and when and how it happened.
A minor issue, such as an overdue mobile phone bill, won’t hinder the approval as much as a major issue like bankruptcy or an IVA/CCJ within the last few years.
The brokers we work with can assist individuals with less than perfect credit histories by connecting them with lenders who are open to more complex cases. As experienced professionals in CIS mortgages, they can provide guidance on the most suitable approach for each individual’s circumstances.
Obtaining a copy of your credit file is a helpful starting point as it provides information on any credit issues and can be useful when discussing poor credit with a broker.
Obtaining a CIS mortgage is comparable to other loan types. With appropriate information and assistance, obtaining a satisfactory deal that fulfils your needs is achievable, regardless of your credit history.
CIS mortgage advice
CIS workers have various mortgage options available to them, and the current market provides flexible solutions that cater to the needs of the modern workforce.
The independent mortgage advisers we work with are experienced and highly knowledgeable about lenders’ criteria and products. They also have access to exclusive rates not advertised elsewhere.
For subcontractors in the UK seeking a loan, CIS mortgages are a viable choice. The use of the gross day rate in calculating the maximum mortgage amount can result in a significant increase in loan size.
Working with an experienced specialist can provide borrowers with access to exclusive deals, regardless of their credit history. With proper guidance, individuals can secure an ideal mortgage to meet their needs.
Just a small selection
of the 120 banks, building societies and specialist lenders that you could have access to.
Only an independent mortgage broker has the ability to search the whole of the market to get the best mortgage for their clients and their individual situation.
