What are crypto-based mortgages?
Crypto-backed mortgages are a kind of loan where borrowers use their cryptocurrency holdings, such as Bitcoin (BTC) or Ether (ETH), as collateral to secure financing for real estate purchases. This approach allows you to access funds without selling your digital assets. By retaining crypto ownership, borrowers can still benefit from future price increases.
There are various types of crypto-backed mortgages: purchase mortgages, cash-out refinancing and bridge loans.
- Purchase mortgages: These help you finance real estate using crypto as collateral.
- Cash-out refinancing: It allows you to refinance your existing mortgages by leveraging your crypto assets to access additional funds.
- Bridge loans: These loans provide short-term financing, helping you cover the period between purchasing a new property and selling an existing one.
Crypto mortgages are particularly appealing if you want to preserve your holdings while securing real-world assets. However, you need to consider the volatility of cryptocurrencies and carefully assess the risks before opting for a crypto-backed mortgage.
Lenders usually accept stablecoins such as Tether (USDt) and USDC (USDC) or major cryptocurrencies like BTC and ETH. Some lenders may accept a diversified portfolio of cryptocurrencies as collateral, which is known as cross-collateralization.
Did you know? With traditional mortgages becoming increasingly difficult to obtain, particularly for younger individuals, alternative solutions are gaining traction. Fintech startups are addressing this demand by offering adjustable or fixed-rate mortgages secured by substantial cryptocurrency holdings.
Crypto-based mortgages vs traditional mortgages
Crypto-backed and traditional mortgages differ from eligibility requirements to risk factors. Traditional mortgages rely on credit history, income verification and down payments, while crypto-backed mortgages use digital assets as collateral.
The approval process for crypto mortgages is often faster, but they come with higher interest rates and volatility risks. Additionally, regulatory uncertainties make crypto-backed loans less widely accepted in real estate markets. A comparison of the two mortgage types is given below:
How do crypto-backed mortgages work?
The basic mechanism of crypto-backed mortgages is that depositors calculate the value of the crypto the borrower proposes to collateralize and release a loan against the amount.
To assess the value of the crypto assets, the lenders may apply a loan-to-value (LTV) ratio, which indicates the percentage of the collateral value you can borrow.
For example, if the LTV ratio is 50%, you can secure a loan of $25,000 for collateralized crypto assets worth $50,000. Overcollateralization helps to create a buffer, which helps the lender if the value of the collateral goes down. Smart contracts are used to automate the execution of loan terms.
Here is a step-by-step look at the functioning of crypto-backed mortgages:
- Step 1: Find a lender – Look for a financial institution or decentralized finance (DeFi) platform that offers crypto-backed mortgages. Compare different lenders based on their interest rates, fees and supported cryptocurrencies.
- Step 2: Apply and submit proof of ownership – Submit an application for getting a loan against the crypto you hold. You also need to provide proof of ownership of your digital assets. The lender will assess the worth of your crypto holdings to determine your borrowing limit. Some lenders may consider other financial factors, such as credit history.
- Step 3: Move crypto to escrow account – Once approved, you need to pledge the required amount of crypto by transferring it into an escrow account. This crypto acts as security for the mortgage loan.
- Step 4: Prep the loan – Complete the loan agreement, which outlines key terms like repayment schedules, interest rates and what happens if your collateral’s value drops. Usually, if the value of the crypto drops, you will need to deposit more crypto in the escrow account so that the loan remains overcollateralized. If you fail to deposit additional crypto, the lender may liquidate your crypto deposits.
- Step 5: Disbursal of loan – The loan funds are typically disbursed in fiat currency for purchasing the property.
- Step 6: Make mortgage payments – Repay the loan according to the agreed terms. The interest rate may differ in line with the market value of the collateralized crypto.
- Step 7: Recover your collateral – If you complete all payments as per the loan agreement, you will get back your cryptocurrency from escrow. If you fail to repay it, the lender may liquidate your collateral to cover the outstanding amount.
Did you know? Freddie Mac data shows that when fixed-rate mortgages were introduced in 1971, interest rates were about 7.5%. However, by 1980, they had dramatically increased to almost 20%.
Benefits of crypto-backed mortgages
Thanks to crypto-backed mortgages, you can access funds to invest in real estate without selling digital assets. You can leverage your crypto assets to take advantage of real estate market growth.
Here are some key benefits of using a crypto-backed mortgage:
- Faster and simpler process: Compared to traditional mortgages, crypto-backed loans generally have a quicker and more streamlined approval process. Lenders use smart contracts to execute loan terms, making the whole process efficient and without prejudice.
- Liquidity without selling: You can access funds to invest in real estate without liquidating your crypto holdings. This is particularly beneficial during a real estate market upswing as you can retain your crypto assets while securing finances for real estate investment.
- Investment growth potential: Crypto-backed mortgages enable you to enjoy double growth. You benefit from appreciation in the prices of the real estate and the growth of your crypto assets.
- Broader accessibility: Crypto-backed mortgages provide financing opportunities for anyone who lacks traditional credit histories. If you have just settled in a country and don’t have financial records there, crypto-backed loans become a viable option.
- Tax benefits: Since no assets are sold, you can avoid immediate capital gains tax. This allows you to access value without triggering taxable events.
Challenges in crypto-backed mortgages
While crypto-backed mortgages offer some unique advantages, they also come with several challenges you must consider. From price volatility to regulatory uncertainties, these factors can impact the feasibility and cost of securing a mortgage with cryptocurrency.
Here are some key challenges in crypto mortgaging:
- Higher costs: Compared to conventional mortgages, crypto-backed loans often have steeper interest rates. Since lenders consider these loans riskier, they set higher costs to protect themselves from potential losses.
- Price volatility: Cryptocurrencies are highly volatile, meaning their value can fluctuate significantly. If the value of the pledged crypto collateral drops, you may need to add more assets or partially repay the loan to prevent liquidation.
- Limited market adoption: Many sellers may not be willing to deal with a prospective buyer who has arranged their loan using cryptocurrencies. This might limit your property purchase options.
- Regulatory uncertainty: The legal framework for crypto-backed mortgages is still evolving. Shifting regulations could impact the availability, terms or tax treatment of these loans, creating uncertainty for borrowers.
Did you know? With $12.1 trillion in outstanding mortgage debt spread across 84 million loans, the average American mortgage holder owes $144,593. These home loans represent a massive 70.2% of all consumer debt in the US, highlighting their crucial importance to the nation’s financial health.
How to decide on a crypto-backed mortgage?
Before deciding on your cryptocurrency-backed mortgage, you need to make a thorough assessment of your financial status and risk tolerance.
Begin by analyzing your cryptocurrency portfolio. Determine how much of your holdings you could pledge and consider how these assets may perform in the future.
Given the volatility of cryptocurrencies, collateralizing a single asset may be risky. Diversifying your collateral across various cryptocurrencies may help avoid potential losses if prices fluctuate.
You also need to carefully analyze the loan terms. Understanding the interest rates, payback plan and any other expenses related to the mortgage is essential. Consider the risks, such as asset liquidation if their value falls dramatically or if you fail to meet repayment terms.
As crypto-backed mortgages are a relatively new financial instrument, seeking professional guidance may help if you feel unsure about it. Consulting with financial and real estate experts specializing in crypto lending can assist you in navigating the process, structuring your loan and aligning your mortgage decision with your long-term investment and financial objectives.
