Your home may be repossessed if you do not keep up repayments on your mortgage.
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Mortgage for Subcontractors
We’re talking about mortgages for subcontractors with David Sharpstone.
What are the eligibility criteria for subcontractors to apply for a mortgage?
There are lots of mortgage lenders that cater for self-employed CIS subcontractors. The easiest way to tell if you are CIS registered is that you should be getting a payslip every week, every month or every fortnight with a 20% tax deduction. If the rate is not 20%, then you’re not being paid through CIS.
Mortgage lenders can work out mortgage affordability from the gross income on your payslip. But each lender will have different requirements. Some lenders might only look at the last three months, while others will look at anything from 12 to 24 months of payslips.
Do lenders have different criteria for subcontractors?
Some mortgage lenders are slightly better able to deal with CIS subcontractors than others. One example is where you might be CIS registered but you’re being paid through your own limited company. Some of them are better able to deal with that.
If you’re registered, some lenders can deal with that better than others – and the same applies if you do multiple jobs simultaneously. Because we’re experts in CIS mortgages we will know which lenders will and won’t suit your specific situation.
Are there any specific mortgage products designed for subcontractors?
Apart from one small building society in Essex which does have contractor and self-employed designed products, no. It’s not a special mortgage scheme. You’re not paying a lower rate – you will get the same rate as anybody who’s employed or self-employed would get from the same bank.
What documents are required for a subcontractor to apply for a mortgage?
First is ID – you need to prove who you are and where you live. Bank statements and utility bills are the main ones plus photo ID via a passport, driving licence or any other government issued document with a photo on it.
Then we come on to income. You need CIS payslips from the last three months to a year, depending on the lender. Your bank statements need to show the income coming in and day-to-day expenditure.
You also need proof of deposit – we’ve got to show a buildup of funds, or if the deposit is coming as a gift we’d need to see where that money is coming from.
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What deposit is required for a sub contractor mortgage?
As we speak at the moment [podcast recorded in July 2023] there are some mortgage products with 0% deposit. That’s a whole separate podcast, but it is possible to get a mortgage with no deposit.
However, typically speaking, a 5% deposit is the minimum. There’s a handful of mortgage lenders that can allow CIS subcontractors to get a mortgage with a 5% deposit.
What percentage of income can subcontractors typically borrow for a mortgage?
This depends on market conditions, but I would say that if a client didn’t have a football team of children and lots of debts, they could usually borrow between 4.25 to 4.75 times their income. If there’s a second person on that mortgage we can use their income as well to boost that total.
That’s fairly typical as a maximum, but that figure will start to reduce with your monthly spending. If you’ve got a Range Rover on finance costing you £900 a month that’s likely to have an impact.
Can subcontractors use self-employed status for mortgage applications?
Yes – but why would you? In the hundreds of CIS mortgages I’ve done over the years, I’ve never seen income be higher on the self-employed figures.
Self employed income is the profit on your tax returns, compared to gross CIS income. If we’re using payslips we’re treating CIS subcontractors as employed. That’s how the mortgage lenders look at them. Effectively we’re using turnover- the gross income before the 20% CIS tax and before any deductions.
With self-employed income, you tend to ask your accountant to keep profit as low as possible to pay less tax. So you look for business expenses to put against it – legitimate ones, not your McDonald’s on the way to site. Mortgages then look at that post-tax profit.
So when you compare gross turnover for CIS compared to self-employed profit, there’s usually a massive difference between the two figures. So you wouldn’t tend to use your self-employed status for a mortgage application.
Are subcontractor mortgages subject to higher interest rates than regular mortgages?
No. Whether you’re a subcontractor, a self-employed contractor, a locum doctor or an employed teacher, you’re not being penalised. You’ll have the same rates as any groups of employment or self-employment would get. There’s no special rates for CIS subcontractors.
Is it possible for subcontractors with adverse credit history to obtain a mortgage?
At the time of recording this in July 2023 there I can think of five lenders in the marketplace that would cater for a range of credit issues, whether that’s CCJs or defaults, and use gross CIS income. So there are certainly options out there.
Do subcontractors need a specific length of service to be eligible for a mortgage?
It differs from lender to lender. Some lenders will accept CIS payslips, so effectively, you could have turned self-employed three months ago and still get a mortgage – which is the beauty of it.
For other types of self-employment you generally need one to two years’ records. So it’s a lot easier to get a mortgage as a subcontractor.
There are some disclaimers here, however. You can’t go from driving an ice cream van three months ago to becoming CIS registered and expect to get a mortgage. You’ve got to have a track record of working in that industry. You might have been employed or just regular self-employed and then turned CIS.
Some lenders will want one or two years’ track record in construction. It might be that two years ago you were working in another country, which can be difficult to evidence, but with best endeavours we’ll try to.
How can subcontractors improve their chances of obtaining a mortgage?
First of all, make sure that you’ve got all your ducks in a row. I’ve come across a lot of subcontractors that get paid through CIS but don’t even have a payslip. So speak to the boss, tell them you’re looking to buy a property and you’re going to need payslips. As part of the CIS scheme they have to provide them, but a lot don’t until you actually ask.
When you get those payslips, make sure that the net amount after the CIS tax deduction, matches up with the amount that’s gone into your bank account. Sometimes you have to add up four weekly payslips to a single monthly payment on your bank account. Make sure the figures match up, and if not, find out why and be ready with an explanation.
Make sure you’ve got a valid passport or a full UK driving licence – not a provisional. Check you can evidence where your deposit has come from. If it’s coming from abroad, verify with your mortgage broker that it’s from an acceptable country for anti-money laundering checks. Any deposit has to be in a UK bank account at the time of mortgage application. Your broker is here to help with all of this, and preparation is key.
Your home may be repossessed if you do not keep up with your mortgage repayments.
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