Cryptocurrencies have created an avenue for new entrants into the crypto space, including trading, lending, gaming, etc. However, the volatility of crypto assets has led to its immaturity, low liquidity, and scarcity of price signals. But crypto enthusiasts still can’t buy a home with their cryptocurrencies as sellers aren’t looking to sell their houses for crypto, and traditional mortgage lenders won’t collect crypto as a down payment.
Interested persons would have to convert their crypto to cash which attracts significant tax charges. This gap has led some companies to create mortgages that can be accessed with cryptocurrency as collateral. These companies would enable those who have a lot invested in cryptocurrency to buy a home without turning their crypto into cash. However, due to being new, it possesses unforeseen risks.
The crypto mortgage products are directed at the crypto wealthy, who can use their crypto assets as collateral to get the funds required to purchase a home. The growth in crypto-backed mortgage products can be attributed to the increasing overlap between the crypto space and real estate. The companies offering crypto-backed mortgage products are a few, and their mode of operation will depend on the lender.
How Bitcoin-Backed Mortgages will Work
Some of the companies offering crypto-backed mortgage products include Milo and Figure. Figure is the most recent company offering crypto-backed mortgages. Crypto lending firm Ledn raised $70 million recently to use in building part of its Bitcoin-backed mortgage product. Moreover, BlockFi and Nexo are giving out loans in cash or stablecoins in exchange for collateral in cryptocurrencies like Bitcoin and Ether.
Milo is a fintech company that is changing the way people access financial solutions and today announced its new crypto mortgage. It offered the first crypto mortgage product to allow crypto investors to utilize their digital assets to purchase US real estate. On the other hand is Figure, a fintech company using the Provenance Blockchain for loan origination, equity management, private fund services, banking, and payments.
Milo and Figure will give out loans equal to 100% of the borrower’s cryptocurrency value, requiring no down payment. Milo offers mortgages up to $5 million, while Figure’s lending power reach as high as $20 million. Milo will accept collaterals in bitcoin, ether, and stablecoins, while Figure will accept only bitcoin and ether. Both companies will offer 30-year terms on their mortgage products like traditional loans.
While Milo has already launched a waitlist for its Bitcoin-backed mortgages, Figure still has its waiting list open. Milo would bear an interest rate between 3.95% and 5.95%, while Figure would be between 5.99% and 7.99%. Mortgages can be paid in cash or with the crypto collateral. The interest rate does not include every fee associated with the loan.
Although getting a mortgage on both platforms requires applicants to have a big crypto bag, Milo may still consider the applicant’s credit, debts, income, and the home of choice. Also, Milo plans on asking for an appraisal or title insurance. Like in traditional mortgages, successful applicants would make monthly payments once they close the loan and own the home. They would gain access to the crypto they used as collateral after fully repaying the loan.
In essence, applicants won’t be able to sell or stake their assets while using them as collateral. However, you may be able to withdraw some of it if the value increases, provided a sufficient level of collateral is maintained.
Bitcoin-Backed Mortgages Benefits
The main benefit of Bitcoin-backed mortgages is that they allow you to hold on to your cryptocurrency and use it as collateral in getting a mortgage. It would save you from paying taxes incurred from selling your asset while helping you benefit from future increases in value.
The benefit for lenders is that they can use recourse apart from foreclosure if a borrower cannot make repayments. However, the property will be foreclosed if the borrower stops making payments and their cryptocurrency is insufficient to cover what they owe.
Bitcoin-Backed Mortgages Risks
One major risk of Bitcoin-backed mortgages is that borrowers can end up bringing more money into the transaction due to the volatility of their cryptocurrency during the period of the mortgage. A margin call would be implemented when this happens, requiring you to add to your collateral. Borrowers are advised to understand the lender’s rules for margin calls to act accordingly.
For example, Milo will request a margin call if a borrower’s collateral value drops to 65% of the loan amount. However, once it reaches 30%, the collateral will be liquidated into US dollars. Similarly, the interest rate can change depending on the crypto asset’s value of collateralizing your loan.
Due to the risks associated with cryptocurrencies, borrowers should use Bitcoin-backed mortgages only when they can’t purchase a home through traditional means. You should use traditional means if you have the income and meet the criteria for getting a regular mortgage.
The Bitcoin-backed mortgages that currently exist are margin loans and not actual mortgages. No Bitcoin-backed mortgage has its loan and property transactions carried out in cryptocurrency. However, as crypto becomes more recognized as an actual currency, homeowners may start selling their properties for Bitcoin and other cryptocurrencies.
Similarly, there is the potential of using the blockchain to decentralize, secure, and scale the mortgage application process. The blockchain can also aid smart contracts to create contracts that remove third parties from the process and bind participating parties. It will reduce administrative costs and make it cheaper to purchase properties.
While the future seems very promising for cryptocurrencies and blockchains with regard to real estate and mortgages, it is still a novel idea. Based on this premise, it is advisable to conduct in-depth research into a project before investing in it. Cryptocurrencies are still very much volatile and risky.