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Crypto-backed mortgages: Can I buy a house using a crypto-backed loan?

Sola Marcus




July 4, 2022

Crypto-backed mortgages: Can I buy a house using a crypto-backed loan?

Well, in a nutshell, you can!  From loadable crypto debit cards and ATMs to crypto point-of-sale devices, cryptocurrency has and continues to play a significant role in mainstream financial conversations.

Add this to the upward momentum of housing prices, and it's no surprise that crypto-backed loans have finally made their debut in the real estate market.

This intersection of crypto and real estate has been on the rise. There are plenty of property developers ready to accept cryptocurrencies as payment and now, some companies offer crypto mortgages where cryptocurrency is used as collateral. Figure is a crypto lending company that launched a crypto mortgage service in March - where clients can get a loan to buy a property if they put up an equivalent amount of money in Bitcoin - and it is not the only player in the space.

In April, Propy, a real estate blockchain start-up partnered with lending platform Abra to allow homebuyers secure home loans using cryptocurrency as collateral. Propy sold off a 70-year-old home in Florida for a total of $654,310 in the first NFT house auctioned in the U.S. This is further proof that real-estate and crypto lending are merging.

As lenders like Abra roll out plans to offer crypto-backed loans for homebuyers, let's look at some of the major trends driving this convergence of crypto with real estate. As well as what investors should keep an eye on moving forward.

What are crypto-backed mortgages?

Crypto mortgages use digital currency as collateral, similar to a fiat mortgage or auto loans. When a borrower takes out a crypto mortgage, the lender checks their crypto holdings to assess how much they can borrow and at what annual interest rate. Once that is completed, the borrower pledges their crypto holdings to the lender as collateral. This figure is usually 100% of the value of the loan. For example, for a $700,000 mortgage, the collateral would be $700,000 worth of digital assets.

Once the borrower buys the property, they start paying back the loan in monthly installments in selected cryptocurrencies or traditional fiat. After the debt is repaid, the borrower regains full control of the crypto used as collateral.

However, because crypto-backed mortgages are still in the infancy stage, companies and consumers experience certain drawbacks. With crypto's growing influence in the financial sector, specifically the mortgage industry, it's essential to grasp some of these issues before trying to get a crypto mortgage.

Challenges facing crypto-backed mortgages

Due to the volatility of cryptocurrencies, it is challenging for lenders to assess the level of risk in issuing a loan to a borrower. If the value of the crypto used to secure a home loan drops, lenders might require more crypto to make up the difference. This is known as a margin call.

It might become much riskier if the currency continues to fall, forcing crypto-lenders to liquidate the assets used as collateral to cover their losses. Borrowers considering a crypto mortgage should confirm the lender's conditions for such situations. For example, early entrant Milo says they will request a margin call if the value of the collateral falls to 65% of the loan amount. If that value falls to 30%, the company will liquidate the borrower's bitcoin into US dollars. UK proptech firm Coadjute may have a workable solution in stablecoins. In 2021, they announced a partnership with R3 to create a stablecoin for mortgages.

There is also the issue of fluctuating interest rates. Crypto loans are trying to break out in a tough market. While perhaps appealing to some borrowers, they don’t appear to offer a better deal on rates than conventional financing. While traditional 30-year mortgage rates in the US have recently risen to 5%, crypto loans can go up to 10% or 12%, depending on the lender.

One reason these loans have higher rates is that they can’t be sold to secondary market financing companies. These agencies buy the vast majority of mortgages, then package them into mortgage-backed securities, and have very strict standards for the type of loans they buy.  

Crypto mortgage benefits

One very attractive feature of a crypto mortgage is that the lender has recourse other than foreclosure if a borrower isn't able to make their payments. The borrower — on the other hand — does not have to liquidate their cryptocurrency to use as collateral for mortgages.

This means no taxes on the sale of assets, and homeowners can continue to benefit from future increases in value. This can be useful for those who have a lot invested in cryptocurrency and not as much wealth in other, more traditional assets. It can also open up opportunities for those that can't buy a home through traditional means. And though it comes with risk, there are start-ups working in the space to address them.

Take LoanSnap’s Bacon Protocol platform. It allows investors to make "stablecoin" investments — a form of cryptocurrency pegged to the U.S. dollar's value — to fund digital, AI-enabled mortgages. NFTs linked to the mortgage liens serve as a form of collateral for the stablecoins invested in the transaction.

The need for more platforms that provide solutions

The potential for crypto-collateralized mortgages is still an emerging use case that is still largely untapped even as ​​real estate and real estate-linked financial products are becoming increasingly influenced by crypto.

Last year, traditional mortgage lenders issued an estimated $1.61 trillion in loans. For crypto-backed mortgage products to successfully gain market share, they'll need to reach the point where clients don’t need to put up as much crypto as collateral. Instead, move closer to the 20% down payment model many banks use today.

This need will open the possibility of a merger between crypto and traditional mortgage financing as a logical next step in the maturation of Crypto Mortgages. This likely merger is not just for mortgages but finance altogether. In another article, we explore the dimensions of a future merger between these seemingly competing industries and whether it has promise.

For one, NFTs have a role to play in tokenizing the ownership of real estate assets far exceeding crypto art speculation. We know this is possible, and many examples already exist. One of the earliest examples was in 2018, about 20% of the luxury resort, St Aspen Regis, was successfully tokenized and sold for 18 Million dollars. In the same year, a luxury Manhatten condo was tokenized for about 30 million dollars.  

What’s next?  

For all this to be possible, financial institutions need legitimate partners. At the heart of this legitimacy for many financial institutions like HSBC is identity verification. The bank signed on in 2021 as the fourth founding member bank of a blockchain-based KYC (know-your-customer) data-sharing coalition in the UAE.

Therefore crypto companies must embrace more robust identity verification methods to check the identity of their users and protect their assets. A global study by Coinfirm found that 69% of crypto startups do not have these “complete and transparent” KYC procedures. And while many people may see anonymity as a cryptocurrency feature, a seamless identity verification process can accelerate customer onboarding and risk identification. This would open products like crypto mortgages to new prospects and new markets.