Guide to CIS Mortgages

If you work in the construction industry, you may have heard the term CIS mortgage banded around. CIS stands for Construction Industry Scheme. This guide looks at mortgages for construction workers and dispels some of the myths about CIS mortgages.

Before we dive in, CIS mortgages do not technically exist as their own product. There are, however, mortgage products that allow construction workers to get onto the property ladder with ease.

This video outlines everything you need to know about a ‘CIS mortgage’. Scroll down to read our full blog:

What is a CIS Mortgage?

Officially, there is no product called a CIS mortgage. Lenders do, however, offer products that allow construction workers to demonstrate their income in a different way to those traditionally self-employed.

As a contractor, you will know your income is sometimes hard to show. Most contractors work on a self-employed basis, and most self-employed individuals claim expenses against their tax liability. After expenses are considered, this reduces your income tax but also reduces the amount of income you can declare to a lender to pass affordability calculations.

Any contractors working under the Construction Industry Scheme (CIS) can provide evidence of income to lenders as pre-tax income per month. This is extremely helpful, as ordinarily a self-employed person would need to show pre-tax profit per annum. For this reason, some lenders treat income from CIS workers in a similar manner to employed applicants, where they request the last one to three months of payslips or invoices as proof of income.

Who is Eligible for a CIS Mortgage?

To show a lender your pre-tax income as a contractor, you need to be registered with the Construction Industry Scheme. These mortgages are not limited to just builders — if you are a member of the CIS, you can evidence your income using pre-tax figures. This includes architects and other industry specialists registered with the CIS.

If you are not registered with the CIS, you will not be able to evidence your income in this way and will instead need to provide the lender with your Tax Calculations and Tax Year Overviews.

Benefits of a CIS Mortgage

The largest benefit of a CIS mortgage is that you can usually borrow more. An affordability calculation is based on your income and typically lenders allow you to borrow up to 4.5 times your annual income.

How Affordability is Calculated

• Lenders look at your income and get a headline figure
• Lenders consider your expenditure and debts
• Any Maintenance Payments (childcare etc)

When you apply for a mortgage, a lender will focus on two areas to calculate your affordability. First, they look at your income and establish a headline figure. For example, if a lender allows you to borrow 4.5 times your salary and you earn £25,000 a year, the headline figure would be £112,500.

Once the headline figure is established, the lender considers your expenditure and existing debts. You may not realise it, but having credit card debt or car finance can significantly reduce your affordability. Where possible, it is best to clear any pre-existing debt before applying for a mortgage to maximise your borrowing potential.

Some expenditure is unavoidable within an affordability calculation, such as childcare, food and regular household bills. These costs do not usually have a significant impact unless they are unusually high.

Lastly, if you have maintenance commitments such as spousal support or child support, these will also be factored into how much you can borrow.

Why the CIS Helps Affordability

As you can see, there are elements of affordability that cannot be avoided and, for most self-employed people, this includes taxation. Income tax represents a substantial portion of earnings that is deducted before a standard affordability calculation is applied.

Under the CIS, you can declare gross income rather than net profit to a lender, allowing you to benefit from income that would otherwise be reduced by expenses and tax. A useful way to visualise this is by comparing your gross profit and net profit figures on your most recent tax return — the difference is often significant.

How Much Can I Borrow with a CIS Mortgage?

The amount you can borrow with a CIS mortgage is determined by the lender and their affordability calculation. For example, some lenders allow you to borrow up to 4.5 times your annual income, while others apply lower limits.

There are also lenders who will consider lending up to 5 times your salary. Your overall borrowing potential will therefore depend on the lender you choose and how much income you are able to declare.

What Deposit Do I Need?

Deposits for CIS mortgages work in the same way as standard mortgage calculations. Most lenders offer their best rates when you have a deposit of 10% or more of the purchase price. However, it is still possible to obtain 5% deposit mortgages, and some lenders also offer family springboard mortgage products that allow you to buy with a 0% deposit.

Although springboard mortgages allow a 0% personal deposit, a family member will usually need to place 10% (or more) of the property value into a savings account with the lender. This money is ring-fenced and used as security if you fail to keep up with your mortgage repayments.

Getting a CIS Mortgage with Bad Credit

Contractors are just as susceptible to credit issues as anyone else, and having a poor credit score can be detrimental to a mortgage application. Most high street lenders prefer applicants to have a good credit score or above. If your credit score is poor, you are unlikely to be accepted by these lenders, even if you are using CIS income evidence.

The good news is that there are specialist lenders who offer mortgage products using CIS income evidence and are more accommodating to borrowers with adverse credit. However, adverse credit typically results in a higher interest rate being charged. Where possible, it is sensible to work on improving your credit score before applying for a mortgage.

If improving your credit score is not an option, there should still be a suitable mortgage product available. To find the right lender, it is best to speak with a whole-of-market mortgage broker who knows which lenders are most likely to accept your application.

Boon Brokers is a UK-based whole-of-market Mortgage, Insurance and Equity Release brokerage. We offer fee-free, no-obligation mortgage advice and can assist you with a CIS mortgage. Contact Boon Brokers today to discuss your mortgage goals.