Through CNBCTV18.com 08/17/2022, 4:38 PM IST (Published)
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One of the latest industries to adopt cryptocurrencies is the home finance sector. Several leading space players are now offering a “crypto mortgage loan” that allows users to buy real estate with their digital assets. Fascinated?
In the short time of its existence, cryptocurrencies and blockchain technology have disrupted multiple 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 home finance sector. Several leading space players are now offering a “crypto mortgage loan” that allows users to buy real estate with their digital assets. Fascinated?
Join us as we explain crypto mortgages, how they work, their pros and cons. Let’s go.
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What are crypto mortgages?
The term is pretty self-explanatory; A crypto mortgage is a home loan that accepts digital currencies as collateral. This means you can get home financing against your bitcoin holdings and other assets.
Crypto mortgages open new doors for people who have their wealth in digital assets. The volatility of crypto now gives them a way into the still waters of real estate without selling their digital assets or losing their HODLer status.
How do crypto mortgages work?
With a classic mortgage, an applicant would have to prove their income with payslips 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 holdings of certain permitted cryptos (usually limited to a handful of mainstream tokens) and you’ll be eligible for a home loan backed by crypto as collateral.
You can get up to 100 percent of the amount needed to buy the home by collateralizing an equivalent amount of crypto. Interest rates vary from agency to agency, but they are much cheaper than unsecured loans.
The term can be between one year and 30 years – a standard for real estate loans. And lenders in the US are offering loan amounts ranging from $5 million to $20 million. You also have the option to pay monthly installments via accepted cryptocurrencies as well as fiat currencies.
Advantages of crypto mortgages
The first and most significant benefit of crypto mortgages 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 can be. Therefore, holding digital assets and disposing of them in real estate is far better than selling them outright.
The second major advantage is the tax savings. In most countries, including India, taxes on crypto are unbearable. However, a crypto mortgage loan relieves you of the tax burden since you are not selling your digital assets, only collateralizing them.
The third advantage is the elimination of documents such as credit reports, payslips and bank statements, which otherwise impede the home loan. Lenders in the US don’t necessarily ask for credit reports and bank statements, although it’s always a good idea to have these documents ready.
Finally, if the value of the security increases drastically after you have pledged it, you can take advantage of an enhanced loan or a second loan for the increase in value.
Disadvantages of crypto mortgages
The most common downside stems from the volatility of crypto assets. If there is a sudden price drop, you may need to post more collateral or it could result in the liquidation of the asset. While mainstream cryptos are unlikely to go to zero, you will need to use alternative collateral arrangements when they do.
The second disadvantage is that you cannot use the pledged digital assets for trading or other activities. The assets are held by the mortgage provider and are only stored and nothing else. As a result, you could miss out on making money by trading, staking, or yield farming the cryptos you promised.
The final downside is that the range of cryptos you can pledge is very limited to the mainstream cryptos like BTC, ETH, USDC and USDT. If you are a holder of another crypto, crypto mortgages 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, bringing people secured loans through digital assets.
Very soon, India could have its own players too. More importantly, the crypto-mortgage industry may be moving beyond real estate and making forays into several other companies and industries.
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