Generally, mortgage providers require self-employed individuals to be engaged in construction work for the last two years and assess the latter’s affordability through their net income from the past year’s self-assessment tax deductions. Construction Industry Scheme CIS workers have slightly different requirements that cater to their unique circumstances.
This article explores construction workers’ mortgages, referred to as CIS mortgages for simplicity, how it works, its benefits, minimum deposit, eligibility, the application process, how much you can borrow based on usual mortgage calculation, and general CIS mortgage advice.
What Are CIS Mortgages?
There is no such term as CIS mortgage, as it is simply the standard mortgage per se. Because construction industry workers offset as many business expenses as they can against their taxes and their salaries are deducted as advance payments for their income tax and National Insurance contributions (NICs), as shown in their self assessment tax return, their CIS self assessment tax-deducted income shows smaller figures, affecting their opportunity to find higher mortgage amounts.
However, through CIS, instead of assessing affordability based on the net profit with deductions for tax payments in their self assessment tax returns—where tax on self-employed income and NICs are already deducted as declared in their CIS payment and deduction statements—mortgage lenders look at CIS workers’ gross profits instead. Lenders offer CIS mortgages even when the CIS worker applicant has less than a year’s accounts (or at least 3 to 6 months CIS bank statements for some lenders).
This mortgage construct is then informally called CIS mortgage, one of the mortgage products that offers a lot of benefits for those with CIS-registered employment status, as they get wider choices and are able to borrow at higher mortgage rates. They don’t have to follow through with their eligible bank list nor wait for more years to fill the original self-employed individuals’ requirement of rendered years before taking a mortgage.
How Do CIS Mortgages Work?
Many lenders accept CIS worker applications, whilst some don’t. Those who do have different lending criteria and assess their applicants on a case-by-case basis. Usually, a mortgage provider requires 12 to 24 months’ evidence of CIS income before accepting applications. Others require fewer bank statement proofs. For instance, one lender is able to offer mortgages with just three months’ worth of CIS payslips or tax payments, whilst another requires six to twelve months’ accounts for track record.
Mortgage lenders base on the applicants’ given payslips to work out an estimate of their annual turnover and check their other financial commitments, such as dependent children, other mortgages, credit cards, business accounts, car loans, and other loans, for the overall affordability assessment. Usually, they multiply the estimated annual income by four times, even up to five, for the offer.
The larger the deposit, the better the applicants’ choices, with some even enjoying the lowest interest rates. However, having bad credit limits their options, although it doesn’t automatically mean they cannot get a CIS mortgage; it may just lead to them getting fewer lenders and most likely opted out of higher mortgage rate potentials.
Their options will depend on the severity of their credit issue and how recent it is. If the issue occurred several years ago, some lenders are still willing to give them the right mortgage according to their financial situation.
What are the Benefits of a CIS Mortgage?
Those who qualify for a CIS mortgage products enjoy several benefits, such as the following:
- They can borrow more as their annual turnover will be estimated by gross amount instead of their net income reflected on their tax return, which, in turn, will show they have stronger debt-to-income calculations.
- They can apply with fewer account requirements. Generally, for the sole trader, two to three years of accounts are required; by working under CIS, their application can be approved with just 12 months or less accounts.
- They have wider access to mortgage deals, even up to a higher rate.
- They can still apply for a CIS mortgage with bad credit.
- They get the most suitable lenders.
CIS Mortgage Rates
Having bad credits and being turned down by several lenders can significantly affect the credit score of CIS workers that apply for a CIS mortgage. Whilst they may still get a mortgage, they have fewer options. For those who have good self assessment tax return records and credit history, their annual income may be multiplied four or five times, increasing their access to high mortgage options and lower interest rates, but that will be decreased by their other financial commitments or outgoings.
To get the best mortgage rates, CIS applicants should work with a mortgage broker or CIS mortgage advice expert who knows the ins and outs of the construction industry, especially mortgages for CIS workers. A mortgage expert can accurately calculate rates and monthly payments, based on their deposits and other variables, before applicants agree to the deal.
They can also give advice on which building societies are best to invest in, whether in high street or rural areas, at a day rate or complete fulfilment of their service depending on their trading style.
How Much Can I Borrow for a CIS Mortgage?
The mortgage amounts applicants can borrow depends on their estimated annual income figure, which is based on their submitted CIS accounts or payslips. Lenders will use the applicants’ gross income to calculate their annual earnings rather than their net income which shows the tax calculation of their advance payments on their tax returns.
Aside from their annual turnover, their outgoings or other agreed financial services are also considered, such as other forms of loans or the number of their dependent children. Their potential affordability, which may be up to 4 or 5 times their income, will be diminished depending on these factors. These two—estimate of annual income and outgoings—are then used to assess their overall affordability or debt-to-income ratio and determine how much they can borrow.
For example, a CIS worker earns £5,000 per month. A mortgage lender with 12 months payslips requirement will use this amount to arrive at an estimate of the person’s total annual income. £5,000 in a year makes £60,000. The applicant has no outgoings or other financial commitments, so the annual figure basis is not affected. This lender usually applies x4 rate of their applicants’ total income to arrive at the maximum amount they can borrow. Annual income multiplied by 4 is £60,000. This would be the approximate mortgage amount can borrow.
How Much Deposit Do I Need for a CIS Mortgage?
If CIS workers have a strong level of employment records, their mortgage application may be accepted even if they will only give a percentage of 5 deposit, as per the new government scheme. Those who want a higher mortgage and best interest rates should aim higher—a minimum of 10 per cent.
Most mortgage applicants opt for a deposit of 10 to 15 per cent to obtain better mortgage rates. Any amount above that would be even better. Those who anticipate leaving the UK will be required to pay a larger mortgage deposit in their application.
Who is Eligible for a CIS Mortgage?
Everyone involved in the construction industry, including those who don’t work directly on the physical construction of a building (e.g., architects), is eligible for the scheme as long as they have 12 to 24 months (fewer accounts requirement for other lenders) from working under CIS. Every building contractor must go through CIS registration first, and whilst it is optional for subcontractors, they must register with HM Revenue Customs as well before pursuing a mortgage application to make the process quicker.
Lenders will require the following:
- Three to six months of CIS accounts or payslips;
- The applicant’s age is between 21 and 75 years old.
- Less to no issues with credit records.
- Minimum of 5 per cent deposit.
- CIS deductions.
Registered subcontractors’ applications are more likely to be accepted even when they only have less than 12 or 24 months of CIS payslips for monthly income proof. Unregistered ones, on the other hand, are required to have a minimum of one year account or an SA302 for the mortgage lender to arrive at their annual income figure calculation.
How to Apply for CIS Mortgage?
It’s easier to apply for a mortgage through these steps:
- Register as a contractor. Subcontractors have to be registered, too, even when this is not compulsory in the scheme. If unregistered, mortgage lenders will always require one to two years accounts for income proof, whilst if they are registered, sub contractor-friendly lenders may accept fewer accounts.
- Compile all paperwork. Mortgage lenders will need a certain number of CIS payslips or bank statements to determine how much the applicants’ business expenses and credit commitments are.
- Evaluate credit rating. Having a relatively recent bad credit history will almost always lead to mortgage application refusals, which can further jeopardise the applicants’ credit records.
- Seek advice from a CIS mortgage advice expert. A mortgage expert knows how hassling the application process is. They can help the mortgage applicant be accepted on the first try and get the best mortgage deal and repayment term.
How Legend Financial Can Help
Rather than having to present three-year-long income proof and tax-deducted net figure like all the other self-employed applying for a mortgage, a mortgage construct specifically catering to CIS self-employed workers, informally called CIS mortgages, enabled construction workers under the scheme to apply for CIS mortgage with fewer accounts and be assessed in affordability based on their gross profits. However, getting approved at the first attempt is not guaranteed, in which rejections can affect their credibility with other lenders.
In this case, mortgage advisers from Legend Financial can help. We are tax experts who specialise in everything related to the Construction Industry Scheme and have helped plenty of contractors and subcontractors settle their CIS needs, up to their CIS penalties affairs. Reach us today!
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