CIS Buy to Let Mortgage
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
Most buy to let mortgages are not regulated by the Financial Conduct Authority
Table of Contents
CIS Buy to Let Mortgage
David Sharpstone talks to us about the Buy to Let mortgage process for Construction Industry Scheme (CIS) workers
Podcast approved by The Openwork Partnership on 16/12/2024.
What is a Buy to Let mortgage and how does it differ from a regular mortgage?
A regular mortgage is one designed for a property you intend to live in. We would call it a residential or an owner-occupier mortgage, and the amount you can borrow is based on how much you earn.
A Buy to Let mortgage is designed for a property you plan to use as an investment, renting it out. You wouldn’t live in it. In fact, it would be a condition of the mortgage that you don’t. It is only designed to let out to tenants.
The amount you can borrow is largely based around the perceived rent the property could attract per month. Some lenders do have a minimum income requirement, but the main factor is the rental.
What are the eligibility criteria for obtaining a Buy to Let mortgage if I’m a CIS worker? What do lenders consider when assessing a CIS worker for a Buy to Let mortgage application?
If you’re paid through the CIS scheme as a self-employed construction worker and you’re looking to get a Buy to Let, the big difference is that there’s no special treatment for CIS income.
Some mortgage lenders require a minimum income and a common figure is £25,000. That wouldn’t be based on your gross CIS pay. It would be based on your profit after expenses as shown on your latest tax return.
You would need to have at least one, if not two, years of self-assessment – and to meet the minimum income requirements for most lenders you’d have to show profit of at least £25,000. So your CIS income really isn’t that relevant to a Buy to Let situation.
You would use a lower income figure – your profit. That’s not usually a problem, because on a Buy to Let, the more you earn, the less you can borrow, which sounds really unusual. It’s around tax – if you fall into the higher rate tax bracket, mortgage lenders lend you less than somebody who earns in the lower rate tax bracket.
Most Buy to Let lenders would also expect you to already be either an owner-occupier, which means you’ve got your own residential mortgage, or you’re an existing landlord. Certain lenders will lend to a first-time buyer, first-time landlord, but they’re few and far between. There are much tighter rules and regulations, because they don’t want you to Buy to Let and then move into the property.
How much deposit is usually required for a Buy to Let mortgage if you’re a member of the CIS scheme?
Being a part of the CIS scheme doesn’t change that deposit amount. Whether you’re paid through CIS, you’re employed or self-employed, the rules are the same in terms of deposit.
As of today, in November 2024, two big high street lenders have entered the 20% deposit market. Normally I would tell people you need 25% but it looks like there are lenders now opening the doors for people to do a Buy to Let with 20%.
They were always there, with a few knocking around, but 20% seems more available now. What I noticed in the messages from the lenders is that to get a 20% deposit mortgage, the property needs an energy performance certificate (EPC) of A, B or C.
You could potentially get away with a lower EPC, but it must have a valid EPC certificate.
Are there any specific fees with Buy to Let mortgages for those on the CIS scheme?
It’s nothing to do with being paid through CIS, but other fees involved with a Buy to Let mortgage include the lender’s arrangement fee. These are standard on Buy to Let and could be anything from £1000 up to tens of thousands. On a really expensive property, I’ve seen fees of up to 7% of the loan amount.
It depends on how the deal is being structured, but be aware of those. You may also find application fees of a few hundred pounds. There may be valuation fees, although some lenders do free valuations.
They need to value the property, so you can’t get around it. If you need to pay, this can cost up to £1,000, depending on the property. A typical valuation fee on a Buy to Let would be in the region of £500.
They’re the main mortgage-related fees, but you would also need to pay stamp duty. I cannot advise on stamp duty, so check with a tax advisor or potentially a solicitor. But as of November 2024, additional properties attract higher stamp duty rates, so check with a tax advisor on that.
I’m a CIS worker, should I choose interest only or repayment on a Buy to Let mortgage?
Being a CIS worker makes no difference in whether you should pay interest only or repayment. As a mortgage broker, I see more clients choosing interest only as their strategy.
The main reason is to get the maximum income every month and view the Buy to Let as a longer-term investment. They’re looking to gain from the asset value increasing.
But interest only isn’t right for everybody. We have to look at your individual expectations and your appetite for risk. Remember that on interest only, you’re just servicing the interest, you’re not actually paying down any of the mortgage.
It comes down to your individual circumstances and how you answer certain questions as to whether your mortgage broker recommends interest only or repayment. Both are entirely suitable. It just depends what your strategy for investment is.
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What are the implications for CIS workers of recent tax changes on Buy to Let mortgages?
I can’t give tax advice, so I’ll stay within the realms of what I can tell you. As of now, in November 2024, Buy to Let properties do attract higher rates of stamp duty compared to buying your first residential property.
That may change, depending on when you’re listening. Always check with a tax advisor and do your research on that.
Also, as of November 2024, if you’re buying Buy to Let property in your personal name rather than in a limited company name, you can no longer offset the mortgage interest against your tax liability. You could previously put mortgage interest against your tax to reduce your bill, but you can no longer do that.
Whether that will ever change in the future, it’s difficult to say. But now you have to pay tax on your entire gross rental income. If you’re using an accountant, they will advise you on how to work out that tax liability. I’m sure there are things you can do to mitigate that, around your fees and costs for buying the property, maintenance and agency costs. But you should always get tax advice before entering into a Buy to Let mortgage.
Are there any government schemes for CIS workers or support available specifically for Buy to Let investors?
None whatsoever as it stands at the moment in November 2024. Buy to Let investors are not a priority for the current or previous government. That’s certainly how it feels.
As such, there are no special government incentives to make it easier for somebody to buy a Buy to Let property.
What are the consequences of defaulting on a Buy to Let mortgage? What are the potential risks specifically for CIS workers when investing in Buy to Let properties?
Whether or not you’re paid through the CIS scheme, the risk is the same. If you stop paying your Buy to Let mortgage, the mortgage is secured against the property so the bank could take it away.
Exactly the same rules apply. When you’re doing your business plan, make sure this is an investment that’s affordable and sustainable. It’s important to factor into your figures a period for rental voids, because if there’s no rent coming in, you’ve still got to pay that mortgage.
If you don’t, you will have that property taken away from you. It registers as mortgage arrears – or even a repossession if it’s taken away. That will have an impact on your short term credit score and will stay on your credit file for at least six years.
If you’re repossessed, even after six years you must state that repossession when asked on financial applications – and certainly on mortgage applications. You always have to be truthful about that.
Make sure it doesn’t happen. Factor in rental voids into your plan and ensure that you’ve got enough savings to cover these, or put away money every month to cover any gaps.
What steps should a first-time Buy to Let investor who is also a CIS worker take before applying for a mortgage?
I dealt with one yesterday for a client paid through the CIS scheme. They live with their family and have no intention of moving out, because they are getting three meals a day and all their washing done.
But they had a decent amount of savings, like a lot of traders do, especially those living at home with very little expenses. They wanted to invest that into a property.
It can be a bit tricker to get a Buy to Let mortgage as a first-time buyer, first-time landlord. Mortgage lenders run the risk that you end up moving into the property, and it’s really clear in the conditions of the mortgage that you can’t do that.
The mortgage lender assesses how much you can borrow on a Buy to Let on your personal income. If you’re already a homeowner, it’s normally based on the amount that the property can attract for rent.
But for a first-time buyer, first-time landlord, your personal income is the crucial thing. Instead of looking at your CIS income, they only use your self-assessed income or your SA302, your annual tax assessment. That’s your profit after your expenses.
For a Buy to Let as a First Time Buyer, living at home with no children and few expenses and financial outgoings, you could probably borrow four to 4.5 times your profit. That’s normally based on an average of your last two years – or the latest year if it’s lower.
For a First Time Buyer, first time landlord looking at property, not only should it be affordable based on your personal income, but you should also avoid buying round the corner from where you’re living. A mortgage lender would just think you will move into that property once your parents kick you out of home.
If that property is an hour away from where you’re currently living and working, there’s less chance of that happening, and more chance of the lender continuing to a full mortgage offer.
How can a mortgage broker help?
Most Buy to Lets are done through mortgage brokers because there’s so much to consider. It would be even more difficult to do a Buy to Let on your own, going direct to a bank and finding the right lender to fit your circumstances.
There are so many more rules and regulations to consider than with a residential mortgage. If you’re going to go into this, then you need to take proper advice from a mortgage broker.
YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
MOST BUY TO LET MORTGAGES ARE NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY.
HM REVENUE AND CUSTOMS PRACTICE AND THE LAW RELATING TO TAXATION ARE COMPLEX AND SUBJECT TO INDIVIDUAL CIRCUMSTANCES AND CHANGES WHICH CANNOT BE FORESEEN.
TAX ADVICE IS NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY.
Approved by The Openwork Partnership on 16/12/2024.
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