Loans on favorable terms are sometimes not given on your word of honor, but require collateral. Almost any property can become collateral. Some foreign platforms have begun to issue loans, such as mortgages, secured by cryptocurrency.

What is a crypto-backed mortgage?

A crypto-backed mortgage is a completely ordinary home loan that uses cryptocurrency as collateral: bitcoins, ethers or other altcoins.

The idea of ​​using digital currencies as collateral arose when the crypto industry gained sufficient popularity among people. High volatility and great potential for growth in the value of cryptocurrencies have pushed market participants to use it as collateral for conventional loans.

The process of issuing a mortgage using digital assets is quite simple. The lender calculates the value of the cryptocurrency you have in your hands. Depending on this, the loan amount and interest per annum are calculated. The cryptocurrency will be held by the lender until you repay the borrowed funds in full. To ensure security and transparency of transactions, organizations issuing mortgages use blockchain technologies and smart contracts when conducting transactions.

As a rule, such operations are carried out by crypto-lending platforms. Among the currently operating sites we can highlight USDC.homes,
Milo Mortgage And
Salt Lending. The choice of cryptolending organizations must be approached with great attention, as they can often encounter problems, including the liquidation of the business. Examples of Voyager Digital and
Celsius many remember with their bankruptcy.

Types of crypto-backed mortgages

So, housing loans with crypto collateral are as follows:

  1. Buying a mortgage: conventional financing in which a loan is issued against cryptocurrency as collateral.
  2. Refinancing: re-issuance of an existing mortgage on new terms using cryptocurrency.
  3. Bridge Loans: A type of short-term loan where the buyer simultaneously sells and buys real estate at different prices. In this case, a loan allows you to cover the difference or not wait at all for the receipt of funds from the sale. In this case, cryptocurrency acts as collateral for a short-term loan.

How cryptomortgages work

The cryptomortgage procedure begins with the borrower providing the lender with his digital assets so that he, in turn, can say how much of the loan should be expected.

  1. Initially, the lender evaluates whether the cryptocurrency meets its requirements. Then it determines additional conditions: interest rates, repayment conditions and loan term.

  2. Next, the borrower deposits the cryptocurrency into the lender’s escrow account under pre-agreed conditions.

  3. The account is maintained by a third party, who undertakes to preserve funds, valuables and documents for the protection of both parties to the transaction until all conditions are met (the mortgage is not repaid and the deposit is returned).

Security blocked for the entire loan repayment period. To control the risk of volatility, as a rule, the borrower needs to have some kind of buffer between the value of the collateral and the residual value of the loan.

Payments are usually made in fiat currency. After the last payment is made, the deposit is returned to the borrower. In some cases (usually with an unprecedented collapse in the market value of a cryptocurrency), margin call – a situation in which it is necessary to further increase the cost of collateral.

Most often, the buffer is determined in advance as a percentage, as the ratio of the value of the collateral to the loan balance. Let’s say you have five bitcoins. This is your collateral. The lender requires a 30% buffer. This means that you need to provide the equivalent of 6.5 Bitcoins to hedge against the risk of changes in volatility over the life of the loan.

The buffer provides insurance for both the lender and the borrower, reducing the likelihood of possible margin calls and liquidation of collateral.

What can be used as collateral?

What is used as crypto collateral?

Almost any cryptocurrency can be accepted as collateral. In particular, stablecoins should be noted, as they are less susceptible to market price fluctuations. In addition, there is a separate cross-collateral option, when several cryptocurrencies can be used as collateral.

DeFi mortgages, which use blockchain technologies and smart contracts, should be placed in a separate category. DeFi protocols work anonymously, allowing you to securely take out loans without intermediaries. Examples of such platforms are
Aave And
Compound.

There is also the possibility of a mortgage with equity participation. Here, participants use blockchain technologies to tokenize real estate and offer equity participation. This gives investors a new way to get involved in venture capital investments.

How to buy real estate on credit with crypto collateral

The purchase of real estate using crypto-secured loans can be divided into several stages:

  1. Choose a crypto lending platform where you are going to take out a mortgage. It is worth giving preference to proven sites with a good reputation.
  2. Determine the cryptocurrency that you will use as collateral. Please take into account the fact that sites may not accept any coin as collateral.
  3. Fill out a loan application indicating all information about yourself and proof of your cryptocurrency.
  4. The landing platform evaluates the data you provide to decide on the size of the loan it is willing to provide to you.
  5. Once the size of the mortgage is determined, an agreement is signed. At the same time, you need to pay close attention to all the aspects that are specified in it: rates, payment terms, collateral requirements.
  6. Direct issuance of a loan in fiat or cryptocurrency, which will then be used to purchase real estate.
  7. Even if all the previous stages have passed without problems and you make your mortgage payments on time, continue to monitor changes in the market price of the cryptocurrency in the collateral and changes in legislation so as not to have problems (also pay attention to whether such an option is available specifically in your jurisdiction).

Do crypto-backed mortgages have any particularly significant advantages? And what real risks can accompany this type of loan?

Advantages of a crypto-backed mortgage

The first plus is the absence of the need to pay income tax. If you were to simply sell cryptocurrency, it is likely that you would do so at a price higher than the one at which you purchased it. Thus, you would have income, which means tax on it. With a mortgage, you pay nothing to the state. You simply give the cryptocurrency for temporary storage until you pay off the loan. You don’t have any income as such.

Second plus cryptomortgages: not everyone has access to what traditional banks offer. Well, you need to live somewhere. So the option of a mortgage, when cryptocurrency acts as collateral, turns out to be quite convenient.

Third plus – the possibility of increasing the value of your assets. Essentially, when you pledge something (in this case cryptocurrency), you do not lose it. Accordingly, while you are repaying the loan, the assets accepted as collateral may increase in price. This way you will close your mortgage and earn money on cryptocurrency.

Fourth plus consists of the meeting of traditional and digital markets, which leads to deeper penetration and recognition of cryptocurrencies.

Risks of crypto-backed mortgages

First problemSomething worth noting is the volatility of cryptocurrencies. On the one hand, this is a plus, as it gives us hope for rapid growth. On the other hand, the value may drop very quickly, and your lender will require additional collateral from you. The same margin call will occur.

Second aspect, which can cause headaches – legal. Cryptocurrency legislation, in addition to differing from country to country, in most cases is also very little developed. There are a lot of uncertainties in legal documentation. This can lead to problems with the law if certain (non-specific) articles are interpreted against you.

The second problem follows third. Lack of legislation may put your crypto assets at risk, since there will be no supervisory authorities. In this regard, you yourself need to very carefully read all the agreements so that the creditors, in a simple way, do not cheat.

Fourth problem lies in the subject’s real understanding of the risks associated with a crypto-backed mortgage. It is necessary to clearly understand: can you afford such a loan at this particular point in time?

Summarize. Cryptocurrency mortgage is a new direction in the financial market, gaining momentum in global practice. It is still at an embryonic stage due to the lack of development of a number of aspects at the legislative level. However, now this type of loan allows you not only to purchase housing, but also to earn money in the process of repaying the loan.