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What is a CIS Mortgage?
What is a CIS mortgage and how does it work?
CIS stands for Construction Industry Scheme. It’s a way contractors deduct payments from subcontractors and then pass them on as advance payments for tax to HMRC.
A CIS subcontractor is in the middle ground between being employed and self-employed, but some lenders will class them as employed. You just need to have your last three months pay slips from your contractor.
The lender will average those and multiply them by 46 to 48 weeks in a year to find out what your income is. There are advantages to that, which I’ll explain in a second.
Who is eligible for a mortgage as a CIS worker?
It’s the Construction Industry Scheme, so there’s a clue there – you have to be in a trade. You could be an electrician, carpenter, plumber, bricklayer, construction engineer… that type of thing.
The important part is that the contractor has to be registered with the CIS scheme. It’s a government scheme and you can join it if your contractor is registered.
Can self-employed workers apply for a CIS mortgage?
Yes, if you’re in the construction industry. You can’t just be something else like a mortgage advisor who’s self-employed. Your contractor needs to be registered with the CIS scheme through the government.
What are the benefits of a CIS worker mortgage compared to a regular mortgage? Are there any differences?
First of all, not all lenders do the CIS mortgage scheme. In general, if someone is self-employed and they come to me, a lender will want two years of accounts from your accountant.
If you haven’t got an accountant and you’re a sole trader, for example, you’ll normally need two years worth of self-assessment calculations plus a minimum 5% to 10% deposit.
The difference is with a CIS worker, because your contractor is paying your 20% tax through to HMRC, we don’t need to have those two years of accounts. We only need three months’ worth of payslips.
You normally have to have a six to 12 month history as a CIS worker, but then just three months’ payslips. As I said earlier, they’ll average those three months and times it by 46 or 48 to give us a year.
That’s going to make a lot of difference compared to someone who is self-employed outside CIS. The lender looks at the accounts and net profit. And the whole point of being self-employed, as your accountant will tell you, is to not pay too much tax. You normally have all your expenses come out of your gross profit. You try to make that as small a figure as possible, because that’s what you’re taxed on.
But with that lower figure, you’re not going to get as much mortgage. So with those CIS pay slips, you can normally borrow way more than if you’re treated as self-employed. That’s why the scheme is really good – you can normally borrow more than elsewhere.
How much employment history do you need for a mortgage as a CIS worker?
The lender will normally need to see six to 12 months’ history. When you’re subcontracting and your contractor is a member of a scheme, they have to give you a monthly pay slip to show the deduction going out and how much you got paid. That’s what you basically need for a lender.
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How do the interest rates and fees associated with a CIS mortgage compare to those of a traditional mortgage?
It’s the same for everybody. You’re not penalised in any shape or form. It’s just finding a lender that accepts CIS workers.
I’ve recently had CIS worker who had a 5% deposit and I’ve put them on normal high street rates with a lender. It all went fine and they moved in very quickly.
What documents are required to apply for a mortgage as a CIS worker?
We need to see three months’ pay slips and your bank statements. We need to see money going in from your contractor and expenses coming out. CIS workers are often well organised and have a separate bank account for their contractual pay and one for household spending. We need to see statements for the last three months of both of those.
We also need to see where the deposit has come from. If it’s savings, we need the latest statements. If it’s a gift from the bank of Mum and Dad, we will need a bank statement to show that sitting there, and then when it’s been transferred over.
The lender might also ask your parents for a letter confirming the details, or there may be a template letter to complete and sign. It’s all to do with anti-money laundering.
Finally we need ID: driving licence, passport, proof of address. Sometimes the lender will also ask for a reference from the contractor to confirm they employ you on a subcontract basis, with start dates and your pay per hour or daily rate.
How can I find a reputable lender who offers CIS mortgages?
Speak to a broker like ourselves at Switch. We can go to every lender available in the UK.
Not all lenders treat CIS workers differently. Some just treat them just as self-employed, where you need your accounts, etc.
But quite a few will treat CIS workers favourably, without needing accounts. Use our people, our experience, to find a lender.
I mentioned the average income where some lenders take 46 weeks and others take 48. Having 48 weeks might make a lot of difference. It might mean you could borrow an extra £5,000 or £10,000 and get that property you really want. A lender that will do it based on 46 weeks may not get you the same amount.
So it’s important to speak to somebody like myself. We know who does what, at the end of the day.
Are there any other unique features or requirements of a CIS mortgage to be aware of?
I think I’ve touched on it all, but just to quickly recap, you don’t need two years’ accounts. You only normally need a six to 12 month working history as a subcontractor.
A 5% deposit will do, and it’s based on your 46 to 48 yearly week average earnings. Those are the main points, and the advantages.
What else do we need to know about CIS mortgages?
When you’re trying to buy a property, especially your first home, make sure you have your mortgage arranged in principle with a lender before you start viewing properties.
With a property you really like, there’s bound to be someone else that likes it too. There are a lot more buyers than properties on the market. If you haven’t got your mortgage sorted, the seller and their estate agent aren’t aware of how good a buyer you are. They may not be too positive about your offer.
That’s why it’s massively important to have your mortgage agreed in principle. Estate agents will often ask you to speak to their own mortgage broker. But remember that they’re acting on behalf of the seller, who pays their fee. You want to make an offer on a property, you’re trying to get it as cheap as you can – surely there’s a conflict of interest there?
They know how much you can go to, and if you’re trying to get a cheaper price, they could be duty bound to tell the seller what you can go to, as a maximum. I would always suggest using somebody independent of the transaction.
Do you have any further tips for CIS workers?
I just wanted to raise a point about gambling. This is quite common with CIS workers – it’s just a demographic thing where trades workers sometimes like to have a punt on the football.
Remember that lenders will look at your bank statements. It’s so easy to bet these days on apps and online. If lenders see a large number of transactions, they could tot them up each month. They might see that one month you spent £50, next month £100, and then it went up again… they can see a pattern developing.
They could average that out and include it as a monthly outgoing. Even though it’s money you use for your own social purposes, there’s a habit forming repetitively each month.That might mean you can borrow less, which is not good.
If they see a pattern developing over three months, they could ask for six months’ bank statements. If they then think your betting habit is getting worse, they might decline the application altogether.
That has happened to a client of mine. It wasn’t declined, but I had to have a serious conversation with the underwriter of that lender. The solution, if you do like to bet monthly and you’re thinking about applying for a mortgage, is to take a couple of months off. That’s all I would say – this is becoming a common occurrence with mortgages.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP WITH YOUR MORTGAGE REPAYMENTS.
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