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 guide outlines everything you need to know about ‘CIS mortgages.’
What is a CIS Mortgage?
Officially there is no product called a CIS mortgage. Lenders do however offer products that allow constructors 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, it will reduce your income tax but also reduce 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 1-3 months of payslips/invoices as proof of income.
Who is Eligible for a CIS Mortgage?
To show a lender your pre-tax profit as a contractor you need to be registered with the Construction Industry Scheme. The mortgages are not limited to just builders, if you are a member of the CIS, you can evidence your income with pre-tax income. 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 send the lender your Tax Calculations & Tax Year Overviews.
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Benefits of a CIS Mortgage
The largest benefit of a CIS mortgage is you will be able to borrow more. An affordability calculation is made on your income and typically lenders allow you to borrow up to 4.5 times your annual income.
How Affordability is Calculated
When you apply for a mortgage, a lender will focus on two areas to calculate your affordability. First, they look at your income and get 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 will be £112,500.
Once they have the headline figure, they consider your expenditure and debts. You may not realise but having credit card debt or car finance can reduce your affordability calculation considerably. If possible, it is best to clear all pre-existing debt before applying for a mortgage to get the maximum affordability calculation.
There will be some expenditure that you will find unavoidable with an affordability calculation such as childcare, food and regular bills. These expenditures don’t tend to have a significant impact on your affordability unless they are abnormally high.
Lastly, if you have maintenance payments such as spousal support or child support, these will also be considered when calculating how much you can borrow.
Why the CIS Helps Affordability So MuchAs you can tell, there are going to be aspects of affordability you simply can’t avoid and for most self-employed people this includes taxation. When considering the rate of income tax, it is a substantial percentage of your money that disappears before you do an affordability calculation.
With the CIS you declare gross profit rather than net profit to a lender and benefit by retaining that percentage of money that would otherwise be lost. A good way to visualise this is to look at your gross profit and then your net profit figure on your last tax return. After expenses and tax, you will see a significant difference in the values.
How Much Can I Borrow with a CIS Mortgage?
The amount you can borrow with a CIS mortgage is limited by the lender and their affordability calculation. For example, some lenders allow you to borrow up to 4.5 times your annual salary whereas others have lower calculations.
There are lenders that allow you to borrow up to 5 times your salary as well. Your borrowing will therefore be limited by the lender you choose and the amount of income you can declare.
What Deposit do I Need?
Deposits for CIS mortgages work in the same way as normal mortgage calculations. Most lenders offer the best rates if you have a deposit of 10% of the purchase price or more. You can however obtain 5% deposit mortgages and even use the family springboard mortgage products that offer a 0% deposit option.
For clarity, although springboard mortgages have a 0% deposit, you will still need a family member to put a 10% (or more) deposit into a savings account with your chosen lender. This savings account is ringfenced and used as collateral by the lender if you fail to keep up with mortgage payments.
What Our Clients Have To Say
Getting a CIS Mortgage with Bad Credit
Contractors are as susceptible to credit problems as everyone else and having a bad credit score can be detrimental to a mortgage application. Most high street lenders prefer a credit score of good or above. If you have a bad credit score you are unlikely to be accepted with these lenders even if you use CIS income evidence.
The great news is that there are other lenders who offer mortgage products using CIS income evidence and are favourable to adverse credit borrowers.
Adverse credit typically results in a higher interest rate being charged by the lender. If possible it is a good idea to work at improving your credit score before applying for a mortgage.
If improving your credit score isn’t an option, rest assured there should be a mortgage product for you on the market. To find that product, it is best to speak to a whole of market mortgage broker who will know which lenders to approach on your behalf.
Boon Brokers is a UK-based Whole of Market Mortgage, Insurance and Equity Release broker. Boon Brokers offer fee-free, no obligation mortgage advice and can assist you with a CIS mortgage. Contact Boon Brokers and discuss your mortgage goals today.