Digital assets-backed mortgages let house customers utilize their crypto holdings as collateral.
The latest crypto boom has made fortunes for many, and some of them are looking to purchase real estate with their new riches.
There are plenty of examples of real estate developers who are keen to accept cryptocurrency as payment, but selling their digital investments is a no-go for confident crypto investors.
How crypto-backed mortgages work
At a high level, crypto mortgages work similarly to old-fashioned mortgages. The only difference is that the collateral is holdings of digital assets.
When you take out a crypto mortgage, the lender first examines your crypto holdings to estimate how much you can borrow. This is the most essential factor in the decision, as crypto lenders won’t necessarily ask for credit histories and payslips, although it doesn’t hurt to have them ready.
After the lender decides on the terms (how much you can borrow and at what annual interest rate), you need to pledge an amount of your crypto to the lender as collateral for the loan. This usually corresponds to 100% of the loan.
Where can you get a crypto mortgage?
Crypto mortgages are still a fairly new phenomenon, but there is a growing number of lenders that are allowing home buyers to tap into their digital wealth. All effective annual rates are current at the time this report is prepared.
- USDC. Homes offers crypto mortgages for those looking to buy real estate in Texas. The lender accepts Bitcoin, Ether, USDC, and other cryptocurrencies as collateral to borrow up to €4 million at an APR of 5.5% to 7.5%. The down payment for the crypto mortgage is pegged, allowing borrowers to earn interest on the collateral that offsets a portion of the monthly mortgage payment.
- Figure, A North Carolina-based lender has opened a crypto home loan waiting list of up to €18 million. It plans to accept bitcoin and ether as collateral and offer 30-year fixed-rate mortgages with monthly collateral adjustments for just 6% APR.
Who are crypto mortgages for?
Right now, crypto-backed mortgages aren’t the ideal way to buy a new home for most people.
But it can be an interesting option for those homebuyers who have mainly accumulated their wealth in cryptocurrencies and do not want to sell their cryptocurrencies investments.
Pros of crypto mortgages
If you are one of them, there are some perks of leveraging your cryptocurrency holdings for a loan:
- First of all, you don’t have to retire your cryptocurrency investments to buy a home with a cryptocurrency mortgage. This is important as capital gains tax would apply if you sold your investments.
- Buying real estate in the US may be easier for foreigners since crypto mortgage providers generally do not require a credit score or social security number.
- For someone who believes their cryptocurrency holdings will increase more than the lending rate over time.
Risks and downsides of crypto mortgages
- The reason a crypto mortgage isn’t right for most people is simple: Crypto’s cost is highly volatile, making them high-risk assets.
- If you take out a loan on top of your crypto assets, the risks are compounding. When cryptocurrency markets crash, they bring down the value of the collateral, too.
- When the price of the digital investments you have put up as collateral drops, the lender may need you to add more of your investments to the collateral – akin to a margin call in traditional markets. This way, your capital is closed and you cannot trade it.