When it comes to buying a new property, mortgages can be extremely helpful.
With the help of mortgage loans, you can afford a new home without paying the full purchase price upfront and allows you to purchase a property where you do not have the full funds. Of course, this means that you need a steady income source to pay the monthly mortgage payments.
However, if you are a contractor involved in the construction industry, then you may not always have a steady stream of income. This is why CIS mortgages exist, for they can allow you to buy your dream home as a contractor.
But now you may ask – what exactly is a CIS mortgage? Well, that’s what we have discussed in this guide today. Read on to know more!
Table of Contents
- What Are CIS Mortgages?
- Who Is Eligible For A CIS Mortgage?
- Benefits Of CIS Mortgages
- How To Apply For A CIS Mortgage?
- Frequently Asked Questions
What Are CIS Mortgages?
Let’s start from the basics, beginning with a discussion of what CIS actually is. It is short for “construction industry scheme,” which is a government framework that has been developed to improve revenues collected from the construction industry (hence the name).
According to the UK government, the CIS allows contractors to deduct certain amounts of money from the payment of subcontractors as tax. This deducted money is eventually passed on to the HMRC – the primary tax-collecting authority in the country.
Of course, the primary contractors need to be registered in this scheme to be eligible. And while it is not necessary for subcontractors to register, we would suggest doing that regardless.
That’s because registered subcontractors have a lower rate of deductions potentially, thereby allowing you to save more money.
Now, going back to the main question – what exactly is a CIS mortgage? Simply put, it is a mortgage that enables individuals registered under the CIS to buy a property. However, you need to keep in mind that a CIS mortgage is not a distinct category or type of mortgage product.
Rather, it is the same as any regular mortgage that other home buyers apply for. The CIS is merely a framework that allows eligible individuals registered under the scheme to present their income accurately to lenders and meet their lending criteria.
For the sake of convenience, the term “CIS mortgage” is used to indicate a mortgage that is offered to such an individual.
Who Is Eligible For A CIS Mortgage?
As you can guess by now, CIS mortgages are primarily meant for people working in the construction industry. To be more precise, it is meant for independent contractors and subcontractors who work on different types of construction projects.
Naturally, this type of work holds a unique employment status that is distinct from regularly employed individuals who earn fixed incomes. Most independent contractors are able to choose the type of contract they want to work on, which gives a certain degree of autonomy that is absent in regular employment.
It is also slightly different from freelancing or self-employment since the contractors and subcontractors are considered regular workers who have basic employment rights and may receive a set amount monthly rather than having a highly fluctuating income.
That said, if the contractor is unable to find work on a regular basis, then their annual incomes may exhibit irregular fluctuations and uncertainties, similar to self-employed individuals.
This is where the CIS becomes helpful, for it allows contractors to present their annual income in a better way to lenders.
With it, you can present your gross turnover as annual income instead of using only net profits. The latter is the norm for self-employed individuals and thus could result in a lower borrowing amount for a CIS contractor than using gross amounts.
Benefits Of CIS Mortgages
1. Higher Borrowing Amount
Lenders usually consider the annual income to determine the maximum mortgage amount. In most cases, it is around four-and-a-half times the reported income, but there are some lenders that deviate from this standard.
Self employed net profit often becomes low due to the extra costs and expenses being deducted from the gross profits.
That will naturally reduce the amount of money you can borrow. However, since CIS allows you to report the gross profit to the lender as income, the mortgage ceiling increases.
This is where an expert mortgage advisor will come in handy as lenders criteria often differs on whether they will use self employed net profits or gross figures for a CIS contractor.
2. One Year Of Accounts Required
Conventionally, self-employed individuals find it difficult to get a mortgage because they often need to provide around two to three years’ worth of accounting details.
And while there are a few lenders that offer mortgages with a single year’s worth of accounts, they are much harder to find.
On the other hand, if you apply for a mortgage as a registered CIS contractor, you may only need to provide accounting details for the past year and so may increase the chances of your mortgage getting approved. Once again this benefit is very lender dependent.
3. Higher Affordability
Since you can borrow more money potentially using gross amounts, the mortgage affordability calculations may now work that you could purchase a property at an increased value or you may choose to use less of your deposit upfront. .
How To Apply For A CIS Mortgage?
If you are a CIS-registered contractor or subcontractor who hasn’t applied for a mortgage before, you may naturally think that the process is complicated. However, applying for a mortgage is pretty simple as long as you have the right inofrmation, as we have discussed below.
Step 1: Gather All The Relevant Documents
The first thing that you need to do is gather all the documents required for the application process. It is strongly advised that you gather the following documents:
- CIS payslips for the last 12 months as a minimum
- Bank statements for the past six months (the requirement could potentially be less than this based on the lender).
These are the two of the most important records that you will need to furnish to the lender. Besides these, the lender may request other standard documentation required for mortgage approval, such as identification and address proof.
Step 2: Consult A Mortgage Broker
While this isn’t a mandatory step, we would suggest going for it anyway because mortgage brokers can assist in finding the right lender for your needs.
You should specify your requirements and financial conditions to the broker and get them to review your accounting documents. That way, they can analyse your condition and suggest the best course of action.
Step 3: Find and get the case ready for the lender
Once the broker completes their preliminary review, they will recommend a suitable lender and begin the application process. They will research different lenders available in the market and contact the one that offers the best benefits. .
Step 4: Provide The Documents And Complete Any Formalities
Provide all the relevant documents requested by the lender for assessing the application. This process may take a while, but once it is done, all be well you will be close to receiving your mortgage offer.
Frequently Asked Questions
1. How Much Deposit Do You Need For CIS Mortgages?
The minimum deposit amount you will need to pay is around 5% of the property value, which is the same for other mortgage applicants as well. However, we recommend going for a larger deposit to get better interest rates so as to reduce the amount of interest payable monthly. .
2. Can You Get A CIS Mortgage With Bad Credit?
Your credit score is one of the key elements evaluated by the lender before approving any mortgage. So, if your credit score is low, you may face some troubles during the application process.
But if you consult with your broker, they may be able to refer you to a lender that specialises in bad-credit mortgages, making the process easier.
Now that we have arrived at the end, we hope that the information here has helped you clear any doubts about CIS mortgages.
As you can see from the above discussions, getting a mortgage with CIS potentially is much more convenient than getting a mortgage as a regular self-employed person and could result in a higher borrowing level. .
On that note, if you decide to hire a broker or advisor to help with the process, make sure to do sufficient research beforehand. That way, you can get the best guidance based on your individual needs.
And before you know it, you will be one step closer to getting your dream home.
Your home may be repossessed if you do not keep up repayments on your mortgage.
All content is written by qualified mortgage advisors to provide current, reliable and accurate mortgage information. The information on this website is not specific for each individual reader and therefore does not constitute financial advice.