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CRYPTO-BACKED MORTGAGES: BUYING A HOUSE WITH A CRYPTO LOAN

Cryptocurrency
10 more

Last updated 03/08/2024 by

Benjamin Locke

Edited by

David Hodges

Fact checked by

Andrew Latham
Summary:
Crypto-backed mortgages are used to buy a home, backed up by digital assets such
as cryptocurrency. The mortgages are ideal for those with little income but a
wealth of digital assets. Crypto-backed mortgages do come with risks, however,
such as the overall volatility of the cryptocurrency.
What does it mean to be a digital baron but a physical-asset pauper? These terms
would be inconceivable 20 years ago, but with the rise of cryptocurrency and
digital assets, they are becoming ever more prevalent. The rise of digital
assets has resulted in scores of people around the world becoming rich on paper
but still having difficulty making use of their burgeoning assets. The
difficulty arises when they try to translate those assets into fiat currency or
loans without having to sell and exit their positions.
Fortunately, versions of typical financial services catering to digital asset
holders have recently become a more normal occurrence. Crypto-backed mortgages
are an example. The crypto-backed mortgage concept is something that you should
be aware of, whether you trade crypto already, are looking to get involved in
the space, or just want to keep abreast of current trends as you plan out your
financial future.

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WHAT IS A CRYPTO-BACKED MORTGAGE?

A crypto-backed mortgage is a loan for a home that uses crypto holdings instead
of the home as collateral. Investors can use their digital holdings to
underwrite the loan, with an agreed-upon time frame to pay off the loan. The
loan terms and structure can change based on the behavior of the cryptocurrency
market.

CRYPTO-BACKED MORTGAGES: THE BASICS

Crypto-backed mortgages are really just crypto-backed loans that are used to buy
a home. Call it a crypto-backed home loan, if you will. In fact, the only reason
we use the word “mortgage” in this article is because we’re assuming that the
loan will be used to buy a home. However, it’s important to note that, in most
cases, the crypto lender doesn’t care what the loan is used for as long as the
borrower pays it off.
The reason the crypto lender cares less about this than a traditional mortgage
lender is that the security or collateral backing the loan differs. In a
traditional mortgage, the asset backing up (securing) the loan is the property
being purchased. With a crypto mortgage, the loan-securing asset is not a home.
Instead, digital assets like cryptocurrency act as the security behind the loan.

PRO TIP

It’s important to note that a crypto-backed loan behaves almost like a margin
call when shorting a stock or asset. If the collateral price goes down, the
investor will need to “cover the margin” and top off the crypto assets the
lender holds. This makes crypto-backed loans and mortgages susceptible to the
general volatility of the digital asset market, and thus the crypto mortgage
lenders will request more collateral if the value of your collateral crypto
drops.

CRYPTO LOANS COULD OFFER MORE OPPORTUNITY

A crypto-backed loan provides opportunities for individuals who may not qualify
for a traditional bank loan or other forms of credit. While cryptocurrency can
be volatile, it offers a relatively straightforward means of acquiring funds. As
a result, it can present an opportunity for individuals who may find themselves
in more challenging financial circumstances.
Michael Caspers, founder and CMO of Unity Network, thinks crypto loans and
mortgages are becoming ever more important.
“Obtaining a traditional loan can be a challenging ordeal for some people. Even
if someone has a sufficient income, they may face difficulties due to past
mistakes or not meeting the loan’s eligibility criteria. In such cases, a
crypto-backed loan can provide these individuals with access to capital that can
be obtained easily and repaid promptly. This alternative allows them to
circumvent the cumbersome regulations and potential hurdles imposed by banks,
offering a more convenient and accessible option.”Click to Tweet

HOW CRYPTO-BACKED MORTGAGES WORK

Remember, crypto mortgages are just another form of crypto loans. A crypto loan
might work in the following fashion.

COLLATERAL

The loan will be issued on the basis of collateralizing digital assets. However,
it’s important to note here that not all crypto assets are created equal. You
have your altcoins, such as Neo (NEO) and Dogecoin (DOGE), and your blue-chip
coins, such as Bitcoin (BTC) and Ethereum (ETH). Different lenders will have
different rules determining what type of collateral you can use.

WHAT ABOUT A DROP IN CRYPTO?

In cases where there’s a drop in the value of the cryptocurrency that is backing
up the loan, the lender will request more collateral. As noted earlier, this is
similar to “margin calls,” where investors need to add to their collateral in
order to hold their positions. For instance, if you have an agreement to use BTC
as collateral, and the BTC price drops 50%, you might be required to add more
bitcoin until you can meet the requirements.

TIME FRAME

With standard crypto loans, the time frame can be very short, such as hours or
months. In regard to crypto mortgages, some lenders have come on board offering
crypto loans for 30 years, as long as the loan is used to buy real property.

INTEREST RATE

In most cases, the interest rate on a crypto loan will be higher than what one
would get with a standard mortgage, particularly if that standard mortgage is
for a primary residence or second home. Furthermore, most crypto loans
traditionally have been tied to a variable interest rate. Crypto-backed
mortgages, on the other hand, offer interest rates that are fixed for a period
of time, although this is still a new phenomenon.

TAXES

When sending cryptocurrencies to an exchange, such as that used by lenders for
collateral, you may be liable for capital gains tax (CGT) if the crypto goes up.
This is similar to how you might be liable for capital gains tax should money in
your bank account begin to produce yields that make you liable to pay CGT. This
would be in addition to the CGT that you would pay on your real-world property,
should you sell it for profit.
Since CGT only applies to realized gains, this shouldn’t become an issue until
your lender returns some or all of your collateral to you, such as when you
finish paying off your loan. Make sure you thoroughly understand how your lender
handles collateral crypto as it rises in value, as you pay down your loan, and
when you finally pay your loan off completely. Don’t risk an unpleasant tax
surprise.

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PRO TIP

Crypto exchanges and crypto lending platforms can be either centralized or
decentralized. As a general rule, centralization means greater ease of use, more
features, and an ability to work with fiat currencies. But it can also mean less
personal control and some lost security. Decentralization, on the other hand,
can mean a steeper learning curve, fewer features, and an inability to work with
fiat currencies. This is joined to greater personal control and possibly greater
security, but it also means a greater ability to irretrievably damage yourself
because no centralized custodian can undo your mistakes.

LOAN-TO-VALUE RATIO

A crypto mortgage works very differently from a traditional mortgage in terms of
its loan to value (LTV). For instance, in a traditional mortgage, you might be
able to borrow 80% of the asset’s value, using the home to collateralize the
loan.
Crypto loans, in most cases, will lend 100% based on the value of the crypto,
with no relation to the property you are buying. Furthermore, some lenders might
require that you collateralize 200% of the loan’s value. This flips the LTV on
its head, as you can see below.

70/30 standard mortgage100/200 crypto mortgageThe buyer borrows 70% from the
bank and puts 30% down.The borrower borrows 100% and puts 200% down.

CRYPTO MORTGAGE PROVIDERS

MILO

A Florida-based startup that provides 100/100 LTVs with cryptocurrency. They
will do a 30-year loan up to $5,000,000.

USDC HOMES

USDC Homes offers up to $5,000,000 on mortgages in the state of Texas. Part of
the crypto that is sent as collateral can be “staked,” meaning the investor can
receive a partial interest payment to offset the mortgage.

LEDN

Currently offering crypto mortgages in Canada, with the goal of being able to
lend on US properties very shortly.

PROS AND CONS OF CRYPTO-BACKED LOANS

We spoke to Alexander Wermescher, a founding partner and CEO at CLC & Partners,
which advises clients on Web3 and Blockchain strategy, among other things. Here
is what he listed as his pros and cons of the crypto mortgage space.
Preview: Crypto-backed loan pros include capital accessibility, absence of
credit checks, plus speed and convenience. Cons include opportunity cost and
dependence on crypto value. Details follow.Click to Tweet
WEIGH THE RISKS AND BENEFITS
Here is a list of the benefits and drawbacks to consider.

PROS

* Capital Accessibility: They allow holders to access capital without needing
to liquidate their crypto assets. In addition, borrowers can acquire 100% of
the necessary funds for a home purchase with sufficient collateral.
* Absence of Credit Checks: Many platforms don’t require a credit or FICO
check, making loans accessible to those with poor or no credit history
* Speed and Convenience: These loans can often be processed more quickly and
with less paperwork than traditional loans, thanks to the automated nature of
blockchain technology.

CONS

* Opportunity Cost: The collateralized crypto cannot be staked or spot-traded
which may represent a lost opportunity for additional income or appreciation.
* Dependence on Crypto Value: A significant decrease in the crypto’s value can
negate the benefits of the loan and compound the loss

CRYPTO LOANS FOR OTHER TYPES OF REAL ESTATE AND ASSETS

Many different industries are becoming more accepting of crypto. As mentioned
above, crypto loans need not be used only for buying a traditional home. They
can be used for other assets entirely, and for other types of real estate. In
fact, some real estate investment companies are also considering crypto loans.

ECLIPSE COTTAGES

Eclipse Cottages is a company building high-end tiny homes, focusing on energy
conservation, the latest building innovations, and smart home technology. Each
level of the tiny home can be customized with additional add-ons and smart tech.
Eclipse Cottages currently accepts crypto for payment on their cottages.
Furthermore, they are looking at tokenizing their homes, which could mean they
become more involved in the crypto mortgage-loan space.Click to Tweet

FAQ

CAN A CRYPTO TRADER GET A MORTGAGE?

Yes, a crypto trader can get a crypto mortgage or a traditional mortgage,
assuming he has a stable income that he can prove. A crypto trader might be more
apt to get a crypto loan or mortgage because it offers him the chance to keep
his assets in crypto rather than sell them. Many crypto traders, in the past,
would have just taken out personal loans to avoid selling their assets.

CAN CRYPTO STOP YOU FROM GETTING A MORTGAGE?

No, crypto cannot stop you from getting a mortgage. However, if you want to use
your crypto for a mortgage rather than going the traditional route, be prepared
to have an LTV of 100/100 or 100/200 rather than 70/30 or 80/20. If you want a
traditional mortgage, you will need to have some fiat currency for a down
payment, as well as stable income and credit.

WHICH U.S. BANKS ARE CRYPTO-FRIENDLY?

USAA and BankProv are two “crypto-friendly” banks with physical locations, not
“online banks only.” As crypto becomes more mainstream, be prepared for more
banks coming online that accept crypto mortgages. U.S. banks could also become
more friendly to other blockchain technologies such as smart contracts.

HOW CAN I GET A CRYPTO MORTGAGE?

The first order of business would be to determine the value of your crypto vs.
the price of the home you want to buy. After that portion of due diligence is
done, go online and compare rates and terms. Once done, contact the top 2 or 3
lenders that meet your needs, and inquire.

KEY TAKEAWAYS

* Crypto-backed mortgages are used to buy a home, backed up by digital assets
such as cryptocurrency.
* Crypto-backed mortgages center around individuals who have digital assets but
would like to put them down as collateral to receive a mortgage or loan
without having to sell them.
* Unlike your standard 70/30 or 80/20 LTVs, crypto mortgages often come with
many different LTV types, such as 100/100 and 100/200.
* Crypto-backed mortgages can act similarly to margin calls: if the value of
your crypto goes down, you might be required to deposit more crypto with the
lender.

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Table of Contents

--------------------------------------------------------------------------------

What is a crypto-backed mortgage?
Crypto-backed mortgages: the basics
Crypto loans could offer more opportunity
How crypto-backed mortgages work
Collateral
Time frame
Interest rate

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