The development and acceptance of all things crypto within the fintech space is a process that has received mixed reviews. That’s certainly been the experience of crypto’s entry into the real estate sector. Investors have been able to use virtual currency to purchase homes since 2021, but the going hasn’t been easy.
Purchasing property with cryptocurrency comes with limitations. Many owners aren’t looking to sell their home in exchange for crypto and traditional mortgages won’t allow the assets’ use for a down payment. More generally, turning cryptocurrency into cash comes with big tax implications.
Enter crypto mortgages. Earlier this year Milo became the first fintech company to offer home loans payable with crypto, heralding a flurry of similar financial products to help investors transfer their virtual wealth into real assets. The products are loans secured against a borrower’s crypto holdings and whose proceeds are used to buy property.
For long-term advocates of cryptocurrency, such mortgages may seem like a logical step. But not all financial institutions have been on board, with some withdrawing their products after realizing that the demand was not there.
These alternative mortgages aren’t offered by all lenders but they have substantial benefits.
The most attractive may be the low interest rates they offer; Milo, for example, lists interest rates of between 5.95% and 6.95%.
Also, they don’t require applicants to undergo credit checks. Instead, lenders will conduct Know Your Customer (KYC) and anti-money laundering searches as a means of providing assurance of the borrower’s identity and ask for proof of an applicant’s crypto holdings.
Another benefit is that buyers needn’t sell any of their cryptocurrency to get the cash for a down payment. A crypto mortgage lender will check how much crypto assets a buyer has and use that information to determine how much can be borrowed to purchase the property. The loans can then be paid back in either crypto holdings or traditional fiat cash.
Additionally, some mortgage lenders allow for the use of different types of cryptocurrencies. For example, bitcoin, ETH, and stable coins like USDC and Gemini Dollar are all accepted by Milo Credit. This allows for increased flexibility.
Potential tax savings are yet another reason why crypto mortgages allow for flexibility. According to Forbes, “receiving cash for depositing cryptocurrency as collateral for a loan is not considered a taxable event,” which means buyers don’t need to pay any taxes in order to take out the money that is leant to them.
The absence to a credit check requirement based on FICO scores makes a crypto mortgage more inclusive for those with a limited credit history. It can even be an option for people who have recently moved to the US and are unable to buy because they haven’t had time to develop the required credit record.
Finally, crypto mortgages usually come with a faster completion timeline than traditional mortgages.
Like all other digital coin transactions, cyber security is the biggest shadow looing over crypto mortgages. Chris Wong, co-founder of Block Party, a Web3/Blockchain brand, explains how scammers can take a wallet’s private key to steal digital assets. After hacking into a lender’s list of email addresses, a “bad actor” can pretend he or she is a crypto mortgage lender and send a link to the unknowing borrower requesting their assets. Wong also explains how the lender is unlikely to have an insurance policy to protect against the lost funds.
A lack of credit history can account for the hesitancy many lenders have about offering crypto mortgages, especially since lending to risky borrowers has proven dangerous in the past.
And of course, cryptocurrency’s volatility makes a crypto mortgage subject to potential interest rate increases. Josop Rupena, Milo's CEO and founder explains the challenges: “If the value of the bitcoin fell after the home’s purchase, the borrower would experience a higher interest rate. And while cryptocurrency is technically liquid, its volatility will not be accepted as equal to having cash savings.”
Wong explains how privacy solutions such as Tornado break the record of transactions on any given wallet and add to the difficulty of making a credit check system outside of the KYC process. In other words, if a borrower doesn’t have credit history outside of the crypto space, and lenders are attempting to investigate credit exclusively within the crypto space, an investigation won’t really be possible.
While not for everyone, taking out a crypto mortgage for a new home may be a viable option for holders of virtual wealth. As with any financial undertaking, a careful consideration of the benefits and risks of taking out a crypto mortgage is strongly recommended. Potential borrowers will want to examine both the volatility and freedom a crypto mortgage can offer.