Crypto-backed mortgages are here and more options are on the way
- Crypto mortgages can be useful for those who are crypto-rich and cash-poor and have a lot of their wealth invested in cryptocurrency.
- These types of loans are still very new and Bitcoin's fluctuating value makes crypto mortgages a risky option for homebuyers.
The cryptocurrency market is consistently volatile – users who are unconcerned about its volatility and sharp dips because they are in it for the long haul are using their digital assets as collateral for loans.
While the concept of leveraging against crypto is not new – lately a few companies are applying the model to mortgage lending using cryptocurrency as collateral. These types of loans can facilitate real estate purchases without having to liquidate crypto holdings.
Crypto mortgages can be useful for those who are crypto-rich and cash-poor and have a lot of their wealth invested in cryptocurrency – however, these types of loans are still very new and Bitcoin's fluctuating value makes crypto mortgages a risky option for homebuyers.
How crypto-backed mortgages work
A cryptocurrency-backed mortgage uses digital currency as collateral, similar to a fiat mortgage or auto loan. However, in this instance, the borrower pledges his crypto assets to obtain the loan and pay it off in due course of time.
Bitcoin-backed mortgages use Bitcoin as collateral in the same way a homebuyer seeking a traditional mortgage from a bank or mortgage lender might get a loan by pledging a house as collateral. But, unlike traditional mortgages, both the house and the crypto asset are taken as collateral in a crypto-backed mortgage – and the loan is issued on the assessment of crypto wealth instead of the borrower’s tax returns and FICO scores.
Additionally, the borrower can't sell or stake her crypto while using it as collateral in her mortgage – if the cryptocurrency appreciates in value, some of it can be withdrawn, provided a sufficient level of collateral is maintained.
Bitcoin is the most common cryptocurrency accepted for these mortgages – some of these products also accept ether, depending on the lending platform.
Milo and Figure are two fintech companies that offer crypto mortgages helping investors utilize their digital assets to purchase U.S. real estate.
After announcing the launch of the crypto-backed mortgage back in January 2022, the Miami-based digital lender Milo debuted its service to clients in March 2022 – by claiming to be the first crypto lending company with a 30 year mortgage product. It has a growing waitlist for the product.
In the same month, Milo secured $17 million in funding to keep up with the growing demand, expand operations, and further facilitate crypto holders to buy real estate.
"This is an exciting time for the crypto and mortgage industries," said Josip Rupena, founder and CEO of Milo, in a press release. "With our new crypto mortgage, we can expand our offerings to consumers that were previously denied by other banking firms just for having crypto. We have an opportunity to make sure that doesn't happen anymore and their bitcoin wealth can now help them buy a property."
To purchase a property, clients can pledge their cryptocurrency with insured custodians, Gemini and Coinbase, which act as safeguards of virtual assets. On qualifying, clients can get a low-interest rate starting from 3.95% to 5.95%, and a 30-year crypto mortgage of up to $5 million.
Customers can finance 100% of their purchase with no dollar down payments required – with some flexibility to adjust their rates and monthly payments during the loan period. This means if someone plans on purchasing a house for $400,000, she pledges $400,000 worth of Bitcoin as collateral to Milo, who in turn will then provide the cash to close the deal with the seller.
To qualify a borrower for the crypto mortgage, Milo requires at least the equivalent value in digital assets as the loan amount. Additionally, if the current value of the cryptocurrency pledged drops down to 30% of the value of the loan – the platform is forced to liquidate the cryptocurrency and convert it to USD.
Fiat currency as well as Bitcoin, ETH, and stablecoin are accepted by the platform as collateral deposits.
In March 2022, California-based Figure unveiled two of its upcoming products – Crypto Mortgage and Crypto Mortgage PLUS, both of which allow users to borrow against their Bitcoin or ether to fund home purchases. No down payment is required and the loans are 100% LTV – that means if a borrower puts up $5 million in bitcoin or ether, Figure will give him a $5 million mortgage in return.
“If you custody $1 million of Bitcoin or ether, we’ll give you $1 million in a loan,” said Daniel Wallace, general manager of Figure Lending, to Barron’s. “That means you’re not financing a loan out of pocket — there’s no down payment.”
Crypto Mortgage – This option allows a user to borrow up to 100% of his crypto value – and up to 100% of a home price – with a mortgage loan of up to $20 million for a term of 30 years, at a 5.99% or 7.99% APR depending on the seller’s situation
Figure accepts both fiat and crypto for collateral deposits – and some of the collateral is released when the crypto appreciates to greater than 125% of the loan amount.
Crypto Mortgage PLUS – With this choice, a client can borrow up to 50% of her crypto value to make a 20+% downpayment on a new home, and fund the rest of the purchase with a conventional mortgage of up to $20 million for a term of 30 years at roughly 5.99% or 6.018% APR.
Crypto-backed mortgages offer a few unique features that differ from traditional mortgages.
Crypto lending mortgage platforms do not require much documentation and typically won’t run a FICO credit check on a loan application. That can be useful for a borrower without a lot of credit history.
Borrowers don't have to sell their cryptocurrency to use it as collateral on their mortgage – this means they can benefit from future boosts in value, as well.
Other than foreclosure, the lender has a recourse option if a borrower isn't able to pay his installments. However, the lender may still have an option to foreclose on a home if a borrower stops making payments and his cryptocurrency isn't sufficient to cover what she owes.
Depending on the platform and the borrower’s requirement, borrowers get a choice to receive loan funds in the form of U.S. dollars or select cryptocurrencies.
This type of lending may not be a space that is good for everyone to be in as it caters to the crypto-wealthy – according to Milo’s Josip Rupena. “The rise of crypto has created a new class of wealthy individuals that have a significant portion of their wealth, and even for some of them, all of their net worth is in crypto. The existing mortgage solutions won’t work for them because many of them don’t have a traditional income stream to qualify for a conventional mortgage or their income comes from crypto. These products today are primarily targeted at the crypto wealthy, who may want to keep their capital in crypto while still having access to funds for a home purchase.”
Given the steep volatility of Bitcoin and crypto markets, if the current value of the cryptocurrency pledged declines below a certain percentage of the value of the loan – the cryptocurrency is liquidated and converted to fiat.
Moreover, if the market price of the crypto falls below a certain threshold, lenders may require borrowers to put up more collateral known as a margin call; otherwise, the crypto will be automatically liquidated to make payments on the loan and could result in a huge tax bill or losses on the investment.
As the crypto landscape is constantly changing, capital gains tax and crypto's status as a means of payment are being scrutinized and vary with differing regulatory implications.
Terry Blau, tech lead of Blockchainsure, a Web3 insurance technology company building crypto-backed mortgage infrastructure, thinks it is fairly early in the use of crypto staking technology to conclude its long-term results.
“It's probably worthwhile for every borrower to look at crypto-backed mortgages because they can significantly change the risk-reward profile of an investment and bias it to the borrower's benefit. Because of its ability to generate greater investment returns, it's probably going to be part of the mainstream in the future,” he said.