In the short while that they have been around, cryptocurrencies and blockchain technology have disrupted several industries. From healthcare to supply chain management and more, digital assets and distributed ledgers have revolutionized traditional business practices.
One of the latest industries to adopt cryptocurrencies is the housing finance sector. Several leading players from the space are now offering a ‘crypto mortgage loan’ that allows users to purchase real estate using their digital assets. Intrigued?
Tag along as we explain crypto mortgages, how they work, their advantages and disadvantages. Let’s go.
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What are crypto mortgages?
The term is quite self-explanatory; a crypto mortgage is a home loan that accepts digital currencies as collateral. This means you can get housing finance against your bitcoin holdings and other assets.
Crypto mortgages open new doors for individuals who have their net worth in digital assets. From the volatility of crypto, they now have a way into the still waters of real estate without selling their digital assets or losing their HODLer status.
How do crypto mortgages work?
In the case of a traditional mortgage, an applicant would have to prove his income with salary slips and bank statements, followed by a thorough credit check. With crypto mortgages, these formalities are shortened.
All a person has to do is show/prove the holdings of certain allowed cryptos (usually restricted to a handful of mainstream tokens), and you’re eligible for a home loan that is backed by crypto as collateral.
You can get as much as 100 percent of the amount needed to buy the house by collateralizing crypto worth an equivalent amount. The interest rates vary from agency to agency, but they’re much cheaper than non-collateralized loans.
The duration can be between a year and 30 years - a standard for real estate loans. And lenders in the U.S offer loan amounts ranging from USD 5 million to USD 20 million. You also have the option of paying monthly instalments through accepted cryptocurrencies as well as fiat currency.
Advantages of crypto mortgages
The first and most significant advantage of crypto mortgages is that you don’t have to sell your crypto holdings. Individuals bullish on crypto believe today’s prices are only a fraction of what they can be. Therefore, holding digital assets and divesting them into real estate is much better than outright selling them.
The second great advantage is the break in taxes. In most countries, including India, taxes on crypto are backbreaking. However, you are relieved of the tax burden with a crypto mortgage loan because you’re not selling your digital assets, only collateralizing them.
The third advantage is the omission of documents like credit scores, salary slips and bank statements that otherwise hinder housing loans. Lenders in the U.S don’t necessarily ask for credit scores and bank statements, although having these documents ready is always a plus.
Lastly, if the value of the collateral increases drastically after you’ve pledged it, you can avail of an increased loan or a second loan on the increment in value.
Disadvantages of crypto mortgages
The most common disadvantage comes from the volatility of cryptos assets. If there is a sudden drop in prices, you might have to pledge more collateral, or it could lead to the liquidation of the asset. While it is improbable that the mainstream cryptos will fall to zero, you’ll have to make alternate collateral arrangements if they do.
The second disadvantage is that you cannot use the pledged digital assets for trading or any other activity. The assets are held by the mortgage provider, and it is only stored and nothing else. As a result, you could miss out on making money through trading, staking or yield farming the cryptos you have pledged.
The last disadvantage is that the choice of cryptos you can pledge is very limited to the mainstream cryptos like BTC, ETH, USDC and USDT. If you’re a holder of any other crypto, crypto mortgages might not be for you.
Conclusion
The crypto mortgage industry is on the rise currently in North America, with players like Figure and Milo taking centre stage and bringing digital assets-backed loans to the people.
Very soon, India might have its own players too. More importantly, we might see the crypto mortgage industry moving beyond real estate, making forays into several other businesses and industries.
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