CIS Mortgage
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CIS Mortgage
Richard Grigg explains how the mortgage process works if you are a Construction Industry Scheme (CIS) worker.
What is a CIS mortgage and how does it work?
A CIS mortgage is typically designed for tradespeople on the Construction Industry Scheme.
They receive a payslip every week from their employer, and 20% of their salary goes directly to HMRC for tax purposes.
They will still typically do a self-assessment tax return at the end of the year, but that’s mainly to make sure they get tax rebates – because there are things they can claim for throughout the course of the year. The chances are that with a 20% deduction on every week’s payslip, they end up paying more tax than they need to have done.
From a mortgage perspective, we can utilise the gross pay on that PAYE payslip to hopefully make borrowing a little bit easier. Plus, they’re still able to claim for all the usual things on their end of year accounts.
Who is eligible for a CIS mortgage?
It’s generally tradespeople on the CIS scheme. It lets those individuals have their cake and eat it too. They benefit from a higher income, while still being able to take the deductions on their self-assessment tax return for their additional costs.
Can self-employed workers apply for a CIS mortgage?
Yes and no. Yes, if they’re on the Construction Industry Scheme. If they are not on CIS, they don’t receive pay slips and their employer doesn’t pay the tax on their behalf, they would just be looking at a standard self-employed mortgage.
What are the benefits of a CIS worker mortgage compared to a regular mortgage?
The real difference is that the CIS scheme lets you take advantage of that ‘gross’ pay. For some people, that means they can get a far bigger mortgage than if it were based on their tax returns.
For other people, it unlocks that mortgage more quickly, because they haven’t got to wait. The industry standard for the self-employed is two years’ accounts. Some lenders accept shorter timeframes, but being on the CIS opens up more avenues to help get that mortgage.
If you don’t necessarily need all the borrowing you could get from your CIS payslips, but you still need more than you’d get from your self-employed accounts, it takes away that pressure. You don’t need to max out the borrowing available to you.
When you’re not having to take every pound a lender can offer, there’s less worry around whether the mortgage will be accepted at the level you’re looking for.
It can potentially give you better interest rates, as well. As self-employed, you could be losing lenders based on their maximum loan – and these might offer a better rate. They can’t lend enough based on those self-employed accounts, whereas via CIS they can lend what you need.
How much employment history do you need for a CIS mortgage?
That varies a lot across the market. It does depend whether this is something you’ve just started doing or if you’ve got a history. As an example, for a builder who has been in the trade for 10 years but only on the CIS scheme for a couple of months, we’ve got lenders that would certainly help.
But if you’re straight out of an apprenticeship and moving onto the CIS scheme, a lender may want a little more time and experience from you.
How do the interest rates and fees associated with a CIS mortgage compare to those of a traditional mortgage?
There is absolutely no difference. Lenders aren’t allowed to offer different rates based on your occupation. They’re not allowed to decide that people who are self-employed or on CIS pay a higher interest rate than someone who is PAYE.
What it actually does is unlock the amount you need, potentially earlier. You may need a lender that takes the latest year’s accounts rather than a two-year average if it’s a relatively new business. That first year’s accounts are typically lower. So you need a lender that is only going to look at the latest year’s accounts, and that tends to come with a higher interest rate for that increased risk.
However, perhaps a lender who typically needs two years accounts from the self-employed, will also accept the CIS scheme. You could access that lender much earlier via CIS and get a better, more competitive rate.
CIS doesn’t cost a premium and it doesn’t come with any discount. It’s the same lenders and the same rates as for self-employed or PAYE applicants.
Speak To an Expert
Come on in and be quite forward with what you’re after – just be very honest with your mortgage broker. It’s good to make sure that we know absolutely everything about you. That way we can’t be blindsided by a lender. An open book policy is very good when coming to see your mortgage broker.
What documents are required to apply for a mortgage as a CIS worker?
All CIS contractors are still self-employed,so it’s important not to be blinkered into thinking that CIS is the only way to get what you need. A mortgage might fit you perfectly well on self-employment.
For anyone on CIS, I would always suggest gathering 12 months’ payslips or at least a 12 month payment summary, which a lot of employers will give you. It’s a breakdown of payments for the last 12 months, showing your gross pay, tax and net pay.
You should also get two years’ SA302s and tax year overviews or tax calculations and tax year overviews. CIS is not the only option – there may be a better deal for you on a standard self-employed basis.
How can I find a reputable lender who offers CIS mortgages?
The obvious and slightly selfish answer is to use a broker. A good broker will know which lenders offer the CIS affordability options and whether or not that’s the right option for you.
Lenders don’t widely publicise to the general public how they assess income. Work with a good broker with experience, who is well rated and knows what they’re doing.
Are there any other unique features or requirements of a CIS mortgage that borrowers should be aware of?
If CIS is the right route for you, just be extra careful around and how reliable your income is. We often see with tradespeople that timing is really key.
Each lender will assess payslips differently. The right rate might come from a lender that only uses the last three months, for example, rather than 12 months or the tax summary for the previous year. If you’ve had a couple of weeks’ holiday, you won’t have received pay for those weeks. That’s going to drastically adjust your average income across the three months.
We can talk to the lender and show that’s non-typical, but it can still cause problems. It’s the same with volatility. There’s no overtime on CIS. It’s just your hourly rate and the number of hours that you’ve worked.
If the last 10 or 12 weeks have been really high on hours as there’s a deadline to meet, those hours aren’t typical. Later pay slips will be significantly down in comparison and so you could end up with a set of figures that aren’t viable. When you’re working with your broker, do highlight any non-typical hours.
If last year was a big year and you would expect your pay going forward to be less, just explain that. We need to ensure we don’t lose a mortgage offer based on volatility across a selection of payslips.
What else do we need to know about a CIS mortgage?
At the beginning of the process, it’s really important to go through those details with us or any broker you’re using. Highlight that you’re in the CIS. A lot of people get the pay slips, but still consider themselves self-employed.
I had a client last year who had gone through a broker and couldn’t get the size of mortgage they were looking for – and they were about to lose the house. Because we knew they were CIS, we could get an Agreement in Principle and secure the house for them within an hour’s meeting – because we knew where to take that. We knew we could get the borrowing they needed.
Rather than being £30,000 short, we were actually offered £60,000 over what they needed. It gives you reassurance that you’re not trying to get every single pound possible out of that lender. When you’ve got a £60,000 buffer it makes things seem easier.
But just because you’re on CIS, it doesn’t always mean it’s the right option for you. As ever, don’t get distracted by shiny interest rates. Lenders try to catch your eye with a really low rate, but by the time you factor in the fee, it doesn’t stack up.
Your broker’s looking at the right deal overall for you, rather than the shiniest interest rate or the lowest monthly payment.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP WITH YOUR MORTGAGE REPAYMENTS.