Is it possible to buy a house with crypto as collateral?

Of CNBCTV18.com August 17, 2022, 4:38 p.m IST (published)

In the short time they have existed, 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” that allows users to buy real estate using their digital assets. fascinated?

Follow along as we explain crypto loans, how they work, their pros and cons. Let’s go.

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What are crypto loans?

The term is pretty self-explanatory; a crypto loan is a mortgage that accepts digital currencies as collateral. This means you can get home financing against your bitcoin holdings and other assets.

Crypto loans 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 quiet waters of real estate without selling their digital assets or losing their HODLer status.

How do crypto loans work?

With a traditional mortgage, an applicant must prove their income with payslips and bank statements, followed by a thorough credit check. With crypto mortgage loans, these formalities are shortened.

All a person needs to do is show/prove their holdings of certain permitted cryptos (usually limited to a handful of common tokens) and you are eligible for a crypto-backed mortgage.

You can get as much as 100 percent of the amount needed to buy the house by depositing an equivalent amount of crypto. The interest rates vary from agency to agency, but they are much cheaper than unsecured loans.

The duration can be between one year and 30 years – a standard for property loans. And lenders in the US offer loan amounts from USD 5 million to USD 20 million. You also have the option to pay monthly installments through accepted cryptocurrencies as well as fiat currency.

Advantages of crypto loans

The first and most important benefit of crypto loans is that you don’t have to sell your crypto holdings. Individuals who are bullish on crypto believe that today’s prices are only a fraction of what they could be. Therefore, holding digital assets and selling them for real estate is much better than selling them outright.

The other big advantage is the tax break. In most countries, including India, taxes on crypto are regressive. However, you are relieved of your tax burden with a crypto mortgage because you are not selling your digital assets, just giving them security.

The third advantage is the omission of documents such as credit scores, payslips and bank statements that otherwise prevent mortgages. Lenders in the US do not necessarily ask for credit scores and bank statements, although having these documents ready is always a plus.

Finally, if the value of the security increases drastically after you have pledged it, you can take advantage of an increased loan or a new loan on the increase in value.

Disadvantages of crypto loans

The most common downside comes from the volatility of crypto assets. If there is a sudden drop in prices, you may need to put up more collateral or it may lead to liquidation of the asset. Although it is unlikely that the mainstream cryptos will fall to zero, you will need to create alternative security arrangements if they do.

The other disadvantage is that you cannot use the pledged digital assets for trading or other activity. The assets are held by the mortgage provider and are only stored and nothing else. As a result, you may miss out on making money through trading, betting or yield farming with the cryptos you have pledged.

The last downside is that the choice of cryptos you can pledge is very limited to the common cryptos like BTC, ETH, USDC and USDT. If you are a holder of another crypto, crypto loans may not be for you.

Conclusion

The crypto mortgage industry is currently on the rise in North America, with players like Figure and Milo taking center stage and bringing digital asset-backed loans to the people.

Soon India too may have its own players. More importantly, we can see that the crypto lending industry is moving beyond real estate, and making inroads into several other businesses and industries.