If you work as a self-employed contractor, you may find it challenging to get a mortgage. That is where so-called CIS scheme mortgages may help. It is important to note that there is no actual CIS mortgage product – rather, it is about the applicant being a member of the Construction Industry Scheme (CIS).
This article will explain:
- the structure of the construction industry;
- why self-employed contractors may have difficulty getting approved for a mortgage;
- how the CIS works;
- getting a mortgage.
Let’s dive in …
The construction industry in the UK is structured rather differently to many other sectors. It relies on a complex network of relationships between contractors and subcontractors.
At its simplest, contractors pay subcontractors for construction work they do. Many different firms and organisations may pay other businesses for the construction work they do. Often, those contracting businesses are themselves paid by other businesses too. Some firms work as contractors but then also do work as subcontractors too.
The Construction Industry Scheme (CIS)
This all makes for a fairly complicated picture as far as the tax status and liabilities of subcontractors are concerned. To help subcontractors meet their tax obligations, HM Revenue & Customs (HMRC) has devised a scheme – the Construction Industry Scheme (CIS) – which authorises contractors to deduct tax liability payments made to subcontractors and to pay them over, on behalf of the subcontractor, directly to HMRC.
In that way, the contractor agrees to pay the subcontractor’s tax liabilities and National Insurance contributions directly to HMRC and typically sends to the subcontractor a payslip or receipt which shows both the total amount paid (including the deductions forwarded to HMRC) and the net income paid to the subcontractor.
As the official guidance makes clear, there are many details and procedures of which both contractor and subcontractor need to be aware.
CIS scheme mortgages
Where a subcontractor has registered its participation in the CIS scheme, deductions made by the contractor may be made at a standard rate of 20% – if the subcontractor is not a CIS-registered member, the deductions are made at the rate of 30%. To confirm the deductions that have been made, the contractor is obliged to submit a monthly return to HMRC showing the total amounts paid to subcontractors and the deductions that have been made at rates of either 20% or 30%.
Although subcontractors – who are often small tradesmen and the self-employed – typically write off as many expenses as possible against their profits (to reduce the total profits earned and, therefore, the amount of income tax due), the CIS scheme ensures that tax and other deductions are made in advance and submitted directly to HMRC on their behalf.
That alone is a welcome boon to subcontractors. But the scheme also works in favour of individual subcontractors who want to apply for a mortgage.
In their line of work, it is customarily difficult to furnish the detailed statements and proof of income demanded by any mortgage lender in order to conduct the necessary affordability and stress tests when assessing the mortgage application.
For self-employed tradesmen registered under the CIS scheme, however, that apparent difficulty is readily overcome – the payslips and receipts sent from the contractor for work done will prove not only the gross income earned by the subcontractor but also the deductions made on your behalf and forwarded directly to HMRC.
Typically, you will need to support your application to the CIS mortgage provider with six months’ worth of payslips showing that deductions have been made at the rate of 20% (evidence that you are a registered member of the CIS scheme). You will also need to provide approximately six months’ worth of bank statements.
Applying for a CIS mortgage
As not all mortgage lenders grant mortgages for contractors, you may wish to contact a specialist mortgage broker who understands CIS and its mortgage implications.
How much can I borrow under a CIS mortgage?
When calculating your maximum borrowing limits, CIS mortgage providers are likely to multiply your annual net income – the total, less deductions, shown on the receipts or payslips from your contractor – by four or five times, depending on other factors, such as your credit rating and the amount of deposit you have available.
The minimum deposit for a CIS mortgage is likely to be 5% of the value of the property you want to purchase – a loan to value (LTV) ratio, in other words, of as much as 95%. Even if you are offered such a generous mortgage, however, you might want to bear in mind that still better deals may be available if you have a bigger deposit.
Even if you have a poor credit score, some CIS mortgage providers are still likely to welcome your application, provided you have not defaulted on repayments or had County Court Judgments against you within the past 2 years.