The Construction Industry Scheme allows eligible sole traders to evidence their income more accurately to mortgage lenders. Speaking to an expert broker will help you carefully choose the lender who best understands your income and find the best mortgage available to you.
Mortgages for CIS contractors explained
Whilst there is no such thing as a specific ‘CIS mortgage’, being a CIS contractor can still prove incredibly helpful when applying for a mortgage.
Most self-employed individuals find it hard evidencing their income when applying for a mortgage, this is often due to their declared income being significantly lower than their overall turnover.
Many self-employed individuals will offset business expenses against tax in order to minimise their income tax liability. Unfortunately, whilst this practice is acceptable and widely used, it can have a negative impact when you come to apply for a mortgage.
How CIS helps
The Construction Industry Scheme (CIS) gives subcontractors the ability to present their earnings as pre-tax gross income, rather than final post-tax profit.
By doing so, certain lenders will effectively view CIS contractors as employed, and require less stringent checks when establishing their income.
You could borrow more
Mortgage lenders will generally use your annual income to determine how much they could lend you. Most lenders will offer between 4.5 and 5.5 times your annual income.
If you are offsetting your expenses from your annual income then these expenses will also be deducted prior to your loan being calculated.
John earns £50,000 per annum from his plumbing business. John has worked with an accountant and identified £20,000 worth of expenses which he could offset that year which will save him money on his tax bill.
When applying for a mortgage, the lender identifies that John has earned £50,000 but had £20,000 in expenses, so they’ll assume his take home earning were £30,000 and then use this figure to calculate what they can offer him on a loan.
If John was to apply for a mortgage as a CIS contractor, they would instead use his annual figure of £50,000 instead and this would be evidenced by his CIS payslips as opposed to a detailed look at his companies accounts.
One years accounts
Another issue which self-employed individuals face when applying for a mortgage is having to provide evidence of three years accounts. Providing three years accounts can be problematic as most lenders will use an average income figure for the three years.
Businesses that are growing, or have had unusually large expenses to settle will suffer as their income average will be lower. This can result in a lower loan offered by the lender.
As a CIS contractor, most lenders will only request evidence from the past twelve months. This is helpful for the reasons above, and also if you’re business is new and you don’t yet have 24-36 months worth of accounts.
Whilst it isn’t always the case, many lenders will offer preferential mortgage deals to individuals who have a higher incomes. Therefore, being able to prove a higher income to the lender could in-fact get you a better interest rate.
Who can get a CIS mortgage?
CIS is exclusively for self-employed workers in the construction industry. You don’t have to be a construction worker to be eligible, rather you must work in a sector which is connected to the industry such as an architect or planner.
CIS covers most construction work to:
- a permanent or temporary building or structure
- civil engineering work like roads and bridges
- preparing the site – for example, laying foundations and providing access works
- demolition or dismantling
- building work
- alterations, repairs and decorating
- installing systems for heating, lighting, power water and ventilation
- cleaning the inside of buildings after construction work
How to apply?
First, you need to get in touch with the expert brokers here at Prospect Tree Mortgages, we will collect some information and start researching the market for you.
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A mortgage is a loan secured against your home or property. Your home or property may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it. Click here to see our fee info. Think carefully before securing debts against your home or property. The financial conduct authority does not regulate most forms of buy to let mortgage. Prospect Tree Mortgages LTD is the appointed representative of TenetConnect Services Ltd, which is authorised and regulated by the Financial Conduct Authority. TenetConnect Services Ltd is entered on the Financial Services Register (www.fca.org.uk/register) under reference 150643. Prospect Tree Mortgages Ltd is registered in England and Wales under reference 10112043. Registered Office Address: Acorn Barn, Wembdon Business Park, Smeeth, Ashford, Kent, TN25 6SZ. The information contained within this website is subject to the UK regulatory regime and is therefore primarily targeted at consumers based in the UK.