What Are Crypto Backed Mortgages

2 Dec 2023 by Harry Newman 3 min read

Cryptocurrencies are gradually reshaping global financial practices, including the introduction of an innovative financial product: crypto-backed mortgages.

This development has the potential to revolutionise the real estate market by providing crypto users with a novel means of leveraging their digital assets to finance property purchases.

Crypto Backed Mortgages

Crypto backed mortgages are an innovative financing option where borrowers leverage their cryptocurrencies as collateral to secure a mortgage for real estate purchases.

This differs from traditional mortgages, which are backed by the property being purchased, as crypto backed mortgages utilise digital assets as leverage.

In a crypto backed mortgage, the current market value of the borrower's cryptocurrency determines the collateral value.

To qualify for such a mortgage, having a substantial amount of crypto assets is a key criteria, though it is still beneficial to have the standard documentation typically required for a mortgage.

The lender evaluates a loan-to-value (LTV) ratio when considering the crypto assets for collateral.

For instance, imagine an individual possessing Bitcoin valued at $500,000, who is looking to purchase a home.

They prefer not to sell their Bitcoin, as doing so would trigger a taxable event. Instead, they opt for a crypto-backed mortgage.

If the LTV ratio set by the lender is 50%, this individual could potentially secure a loan of up to $250,000 against their $500,000 worth of Bitcoin.

Over the agreed loan period, the borrower repays the mortgage.

If, during this period, the value of Bitcoin increases, the borrower not only benefits from the asset's appreciation but also retains ownership of it.

This arrangement offers a unique advantage, allowing borrowers to hold onto their cryptocurrency investments while accessing the liquidity needed to invest in real estate.

Crypto Backed Mortgage Providers

Milo, a crypto backed mortgage website, presents an opportunity for individuals to use their Bitcoin, Ethereum or Stablecoins as collateral to invest in real estate.

Instead of selling their cryptocurrency holdings, users can leverage them to qualify for and secure a mortgage to purchase a home. Milo offers loan terms extending up to 30 years, with borrowing limits as high as $5 million.

Additionally, Figure is another platform that enables users to utilise their BTC and ETH holdings as collateral for a line of credit, with a maximum limit of $3 million.

This service facilitates the swift and easy acquisition of a home using cryptocurrencies, without the necessity of liquidating crypto assets.

Currently, the availability of such services is quite limited.

However, as cryptocurrencies continue to gain wider acceptance and mainstream adoption, it is expected that an increasing number of providers will emerge, offering crypto-backed mortgages and expanding the options available to those looking to utilise digital assets in real estate transactions.

Pros and Cons of Crypto Backed Mortgages

Pros

Using crypto as collateral enables users to utilise their digital assets without having to liquidate their holdings.
Borrowing against your cryptocurrency can circumvent the tax implications of selling that asset.
Provides an additional opportunity to diversify your portfolio beyond the crypto market.

Cons

If the price of the crypto you used as collateral falls you could run into trouble with fees and may be required to top up the collateral.
The evolving regulatory landscape for cryptocurrencies can impact the terms and stability of these mortgages.
Currently, only a few companies offer crypto-backed mortgages which limits the options for users.