Navigating the world of mortgages can often feel like decoding a complex language, particularly when terms like ‘CIS mortgages’ enter the conversation. While the term ‘CIS mortgage’ isn’t an officially recognised product offered by lenders, it has become a common phrase used to describe a particular approach to mortgage applications for individuals paid under the Construction Industry Scheme (CIS).
HM Revenue & Customs (HMRC) in the UK introduced the CIS scheme to ensure tax compliance among contractors and subcontractors, benefiting those working in the construction industry. The term ‘CIS mortgage’ has emerged as a shorthand way to describe the mortgage application process for CIS workers, with its unique income assessment method.
Though no lender explicitly offers a ‘CIS mortgage’, many are familiar with the CIS scheme and take it into account when assessing an applicant’s income. This understanding leads to a more accurate reflection of a CIS worker’s true earning potential, allowing them to borrow based on their gross income rather than their net profit.
In this article, we’ll delve deeper into the specifics of what a ‘CIS mortgage’ entails, how it can benefit those paid under the CIS scheme, and how to navigate the application process.
What is the construction industry scheme (CIS)?
HM Revenue and Customs (HMRC) has implemented the Construction Industry Scheme (CIS), a tax deduction programme for contractors and subcontractors in the construction industry. Under the CIS, contractors deduct money from a subcontractor’s payments and pass it on to HMRC. This scheme ensures that subcontractors pay their share of taxes and National Insurance contributions.
What is a CIS mortgage?
A CIS mortgage is a type of home loan primarily tailored for construction workers who are part of the Construction Industry Scheme (CIS). While it’s not a specific product offered by lenders, it has become a commonly used term to describe a mortgage application process where income assessment is handled differently to accommodate the financial characteristics of CIS workers.
Under traditional circumstances, when self-employed workers apply for a mortgage, lenders typically base their calculations on the applicant’s net profit. This can be problematic for CIS workers, as their take-home pay (after tax deductions at source) is often higher than their declared net profit.
A CIS mortgage, however, is different. Lenders who offer these mortgages take into consideration the gross income of the CIS worker, including overtime and bonuses. This typically means the worker can borrow more than they could with a standard self-employed mortgage.
Who is eligible for a CIS mortgage?
Eligibility for a CIS mortgage is not exclusive to individuals directly involved in the physical construction of buildings but extends to a range of sectors connected to the construction industry. The Construction Industry Scheme (CIS) covers a wide range of professions, and anyone paid under the CIS can potentially qualify for a CIS mortgage.
Here are some examples:
CIS Registered: To be eligible for a CIS mortgage, you must be registered under the CIS scheme. This scheme involves contractors deducting money from a subcontractor’s payments and passing it to HM Revenue and Customs (HMRC). These deductions count as advance payments towards the subcontractor’s tax and national insurance.
Construction-Related Profession: Although the scheme is specifically designed for construction workers, it’s not limited to those directly involved in the physical construction of buildings. CIS covers a broad spectrum of construction-related professions, including architects, decorators, electrical and plumbing contractors, plasterers, and many others. Essentially, if your work involves the construction, alteration, repair, extension, demolition, or dismantling of buildings or structures, you may be registered under the CIS and qualify for a CIS mortgage.
How do CIS mortgages work?
Here’s how it generally works:
Income assessment: The fundamental aspect that sets CIS mortgages apart from standard mortgages is how lenders assess income. For CIS workers, instead of evaluating net profit or salary as they would for a traditional employed or self-employed individual, lenders consider the applicant’s gross income, i.e., the income before any tax or other deductions. This consideration potentially allows CIS workers to borrow more than they could with a standard mortgage.
Application process: The application process for a CIS mortgage is similar to other types of mortgages. The applicant must provide certain documentation, including proof of income. This proof usually comes in the form of CIS payslips or vouchers and tax returns (SA302 form). Some lenders may also ask for bank statements or other financial documents.
Credit check: Like any other mortgage, lenders will perform a credit check to assess the applicant’s past financial behaviour and creditworthiness. A good credit score can enhance the likelihood of mortgage approval and secure better interest rates. However, some lenders are willing to consider applications from individuals with less-than-perfect credit.Approval and
Mortgage offer: If the application and credit check meet the lender’s criteria, they will issue a mortgage in principle—a conditional offer indicating the amount they are willing to lend. Once the applicant finds a property within that budget, the lender will conduct a valuation to ensure the property is worth the purchase price. If everything checks out, they’ll provide a formal mortgage offer.
Completion: After all paperwork is finished, the mortgage enters the completion stage, where the lender releases the funds, and the applicant can proceed with the purchase of the property.The benefit of a CIS mortgage is that it can better reflect a construction worker’s true income, resulting in a higher borrowing capacity. However, it’s essential to ensure affordability for the mortgage repayments and to consult with a knowledgeable mortgage broker or advisor familiar with the CIS mortgage process.
The Benefits of CIS Mortgages
CIS mortgages come with several benefits for self-employed individuals in the construction industry, including:
Higher borrowing capacity: As these mortgages are based on gross income, borrowers may qualify for a larger loan amount compared to traditional self-employed mortgages, which use net income.
Flexible lending criteria: Lenders who offer CIS mortgages understand the unique circumstances of self-employed individuals in the construction sector. As a result, they may be more lenient with their lending criteria, taking into consideration fluctuating incomes and contract work.
Shorter income history: While most self-employed mortgages require two to three years of income history, CIS mortgages typically only require three months of continuous income documentation.Access to Competitive Rates: Many lenders offer competitive interest rates and mortgage terms for CIS mortgages, making them an attractive option for eligible borrowers.
Eligibility criteria for CIS Mortgages
To be eligible for a CIS mortgage, a borrower must meet the following criteria:
Employment status: The applicant should be a self-employed contractor or subcontractor registered with the CIS.
Income proof: Lenders typically require at least three months of continuous CIS vouchers or payslips, showing consistent income.
Credit score: A good credit score is essential to secure a CIS mortgage, as it demonstrates financial responsibility and the ability to manage credit.
Deposit: As with any mortgage, a deposit is required. The minimum deposit for a CIS mortgage generally ranges from 5% to 10% of the property’s value.Age and Residency: Applicants should be at least 18 years old and a UK resident.
How much can I borrow for a CIS mortgage?
The amount you can borrow with a CIS mortgage typically depends on a range of factors, including your gross annual income, your credit history, and your overall financial circumstances.
Lenders who offer mortgages to CIS workers usually base their calculations on the applicant’s gross income, including overtime and bonuses. This means that CIS workers can often borrow more than they could with a standard self-employed mortgage, where calculations are based on net profit.
As a rule of thumb, many lenders will allow you to borrow between 4 to 5 times your gross annual income. For example, if you earn £50,000 per year, you might be able to borrow between £200,000 and £250,000. However, this can vary significantly between different lenders and will also depend on your individual circumstances.
Some lenders may also take into account your expenses and other financial commitments to ensure that you can afford the repayments. A good credit history can also increase your borrowing capacity.
It’s important to note that while CIS mortgages can potentially offer higher borrowing amounts, you should always ensure that you can comfortably afford the repayments. It can be beneficial to seek advice from a mortgage broker or advisor, who can provide guidance tailored to your individual circumstances and help you find the best mortgage deal.
How much deposit will I need for a CIS mortgage?
The amount of deposit you’ll need for a CIS mortgage can vary depending on the lender’s criteria and your personal financial circumstances. However, as a general rule, most lenders in the UK require a minimum deposit of 5–10% of the property’s purchase price.It’s important to remember that the size of your deposit can impact the terms of your mortgage.
A larger deposit can lead to better interest rates and easier approval, as it reduces the lender’s risk. This is often referred to as the loan-to-value (LTV) ratio: the larger your deposit (and therefore the lower the LTV), the less risk there is for the lender.
For example, if you’re buying a property worth £200,000, a 5% deposit would be £10,000, and you’d need a mortgage for the remaining £190,000. This would be a 95% LTV mortgage. However, if you can afford a 10% deposit (£20,000 in this case), you’d only need a mortgage for £180,000, which would be a 90% LTV mortgage and may offer better terms.
While a 5-10% deposit is standard, certain lenders might require a larger deposit, particularly if you have a less-than-perfect credit history. It’s advisable to speak with a mortgage advisor or broker who has experience with CIS mortgages to get a clearer picture of what might be required in your specific situation.
Will I require any accounts?
When applying for a CIS mortgage, lenders will typically require proof of income. While this doesn’t necessarily mean you need full accounts, as you might with a standard self-employed mortgage, you will still need to provide financial records that substantiate your income.
Common documents that may be required include:
CIS payslips or vouchers: These are documents provided by contractors to subcontractors under the Construction Industry Scheme (CIS) that detail the amount of payment and any deductions made.
Bank statements: These can further verify your income and demonstrate your financial management to the lender.
Tax returns (SA302 Form): This is a summary of income and tax paid that is generated by HMRC when you submit your self-assessment tax return. Some lenders may request this as additional proof of your income.
Proof of continuous employment: Lenders might want to see a steady employment history. This is not a standard requirement but could be helpful in some cases.
Remember, each lender will have different criteria, so the documentation required might vary. It’s recommended that you consult with a mortgage advisor or broker who specialises in CIS mortgages to understand what specific requirements may apply to your situation. They can guide you through the process, ensuring you have all the necessary documents to strengthen your application.
What if I have bad credit?
Applying for a CIS mortgage with bad credit can be more challenging, but it’s not impossible. Your credit score plays a significant role in the mortgage approval process, as it gives lenders an insight into your financial behaviour and reliability as a borrower. However, some lenders specialise in providing mortgages for individuals with less-than-perfect credit scores, including CIS workers.
Here are some factors to consider if you’re applying for a CIS mortgage with bad credit:
Nature of the credit issue: The type of credit problem you’ve had can impact your application. For example, a missed payment on a bill might not affect your application as much as a more serious issue like a County Court Judgement (CCJ) or bankruptcy.
Time since the credit issue: If your credit problems were a long time ago and you’ve demonstrated responsible financial behaviour since, lenders might be more willing to consider your application. If you’ve had recent credit issues, it may be more challenging to secure a mortgage.
Deposit size: A larger deposit can sometimes offset the risk associated with bad credit. The more you can put down as a deposit, the lower the lender’s risk, potentially making them more likely to approve your mortgage.
Income stability: Demonstrating stable income can reassure lenders that you’re capable of making regular mortgage payments. This can be particularly beneficial for CIS workers, as they can often demonstrate a regular and reliable income.
Professional advice: Working with a mortgage broker who specialises in bad credit or CIS mortgages can be extremely beneficial. They can provide advice tailored to your situation and help connect you with suitable lenders.
How to apply for a CIS mortgage
Applying for a CIS mortgage involves several steps. Here’s a general outline of the process:
Speak to a mortgage advisor or broker: It’s advisable to speak with a mortgage advisor or broker who has experience with CIS mortgages. They can guide you through the application process, help you understand what lenders are looking for, and potentially connect you with suitable lenders.
Choose a lender and product: Once you understand your options, you’ll need to choose a mortgage product and a lender. This could be a fixed-rate mortgage, a variable-rate mortgage, or another type of mortgage, depending on what best suits your circumstances.
Submit your application: With the help of your mortgage advisor or broker, you can now submit your application. This will include all your financial documents and any other required information.Remember, every lender has different criteria, and every applicant’s situation is unique. Therefore, this process may vary slightly depending on your individual circumstances and the specific lender.
In summary, CIS mortgages provide a valuable alternative for self-employed individuals in the construction industry seeking a mortgage tailored to their unique financial situation. By taking gross income into account and offering flexible lending criteria, these mortgages can help construction workers access the property market and secure their dream home.
If you’re a self-employed construction worker registered with the CIS and are considering a mortgage, it’s worth exploring the option of a CIS mortgage. Speak with a mortgage adviser who understands the specific needs and requirements of the construction industry to find the best mortgage product for your circumstances.
