Our guide to CIS contractor mortgages
All businesses, including those who are self-employed, are likely to wrestle with cashflow problems from time to time. In the construction industry, where cashflows are likely to involve relatively large sums, the struggle to maintain financial stability is more or less constant.
Our Guide to CIS Contractor Mortgages, therefore, first considers how CIS works before going on to examine some of the implications for contractors – and, more specifically, subcontractors – in search of a mortgage.
Our guide to CIS contractor mortgages
An indication of some of the cashflow issues faced by businesses in the construction industry is published by the Designing Buildings website.
As an aid to cashflow and the management of the tax liabilities owed by businesses within the construction industry, HM Customs and Revenue (HMRC) has introduced the Construction Industry Scheme (CIS).
The Construction Industry Scheme (CIS)
Full details of the Construction Industry Scheme (CIS) may be found on the website of HMRC.
As with many tax issues, the published details are extensive, yet the principal is simple and straightforward. CIS allows registered contractors to deduct payments made to subcontractors in accordance with the latter’s tax status and liabilities to HMRC.
The amount deducted is therefore paid directly by the contractor to HMRC and accepted by the latter as payment in advance for the subcontractor’s liabilities for income tax and National Insurance contributions. The subcontractor therefore typically receives from the contractor payslips detailing both the gross amount paid and the net income received from the contractor.
Whenever the subcontractor is also a registered member of CIS, the standard deductions are made at the rate of 20%, but for those subcontractors that are not so registered deductions are made at the rate of 30%.
Contractors are obliged to file returns to HMRC every month indicating the gross payments made to subcontractors and the amounts paid net of either the standard (20%) deduction or the higher rate of deduction (30%).
Implications for mortgage applications
So far so good. CIS allows contractors, on behalf of their subcontractors, to deduct amounts which are going to be due for collection by HMRC.
Subcontractors enjoy the benefit of advance payments already having been made on their behalf in respect of eventual liabilities to HMRC for income tax and National Insurance contributions.
Subcontractors may enjoy a further advantage, however, whenever they apply for a mortgage. As a standard condition of any lender’s application process, they may need to provide evidence of their income and the affordability of the mortgage for which they are applying.
Typically, subcontractors – especially tradesmen and the self-employed – are accustomed to writing off their expenses against the income they earn. Their aim, of course, is to reduce apparent profits and therefore pay less income tax.
When it comes to applying for a mortgage, however, it is precisely that net profit figure which any lender scrutinises for evidence of the borrower’s ability to repay a mortgage – in other words, its affordability. That leaves many a small tradesman and the self-employed with an evident problem.
If they have been paid under a CIS arrangement, however, they have recourse to payslips clearly stating both their gross and net income (as paid by the contractor, with the appropriate deductions paid over to HMRC in advance).
Lenders with whom we have access to here at Needing Advice, therefore, typically accept as evidence of income payslips made under CIS arrangements showing deductions made at the standard rate of 20% – generally, on the strength of just six months of payslips issued in this manner.
If the subcontractor is not registered with CIS and has payslips showing deductions at the higher rate of 30%, the mortgage lender may still wish to review the applicant’s business accounts in the light of the income declared.
CIS contractor mortgages – how much can I borrow?
Perhaps more than many other types of mortgage application, CIS contractor mortgage applications are likely to be considered on an individual, case by case basis.
Typically, however, affordability is likely to be based on the applicant’s “value of measured work”. This is calculated by taking the monthly gross earnings made by the applicant, multiplying that figure by 12, and arriving at an estimated annual income – as evidenced by 6 to 12 months of CIS payslips.
Some mortgage lenders may then be prepared to advance up to four times the estimated annual income – if monthly earnings are £4,000, for example, the annual figure is £48,000, and the maximum borrowing target may be as much as £192,000.
That maximum is likely to be reduced, of course, in the light of the applicant’s additional outgoings and financial commitments – such as credit card repayments and other borrowing.
How much deposit will I need?
A further critical factor is the size of the deposit you are able to contribute.
Exceptionally, a deposit as low as 10% may be available with some lenders, but the more normal minimum is 20%, with any amount larger than this likely to help you choose from a greater range of mortgage deals – and, of course, a more competitive rate of interest.
CIS contractor mortgages
Mortgages across the board are offered at competitive rates of interest and offer many different terms and conditions. The same holds true for CIS contractor mortgage interest rates – so it pays to shop around when searching for a suitable product.
Many lenders base a mortgage calculation on your quoted day rate as a CIS subcontractor, so that you may choose the size of mortgage required, the repayment term and the rate of interest attracted by any particular product. Each product is also likely to require a minimum “loan to value” (LTV) ratio – typically in the range of 65% to 80% (or, in exceptional cases 10%).
Although self-employed tradesmen may frequently feel at a disadvantage when it comes to securing a competitively priced mortgage, those in receipt of day rate payments under CIS have the advantage to entering the market with clear confirmation of their current and future earnings.
CIS contractor mortgages offer a wide range of mortgage products as for any other mortgage applicant. Why not contact us to see to how we can help you access a suitable mortgage product?