Global financial markets have not been kind to those looking to acquire a home on a modest income, as was the idea we were sold by previous generations. Today real estate markets are facing volatility we haven’t seen in years, and many potential homebuyers have decided to put their homeownership plans on hold.
Borrowers are facing rapidly increasing interest rates and watching as required down payments for homes skyrocket, pricing out more and more first-time buyers. In addition, competing with investment funds willing to buy up single-family homes and apartments for rental income or to flip later only further drives up the inflation of housing, making it harder to compete with only a salary funding your access to credit.
The ability to own a home has become a real problem issue for the millennial and generation z cohorts who have to deal with a housing market that is fueled by speculation and not by the utility. It’s pushed many young investors into risk asset classes to try and make up the shortfall.
While altcoin investors might have to be content with digital real estate in the metaverse since their tokens will never hold any material value, bitcoiners can leverage their newfound wealth to acquire real estate through the help of bitcoin mortgage brokers.
If you’re bitcoin-rich but cash-poor, a bitcoin mortgage lets you put your stack to work by buying a home.
What is a bitcoin mortgage?
In a traditional home loan, the borrower (the individual) approaches the lender (bank) and requests that they provide the funding to purchase the home. The borrower requests that the lender show proof of income and the two parties agree on a repayment program spanning several years at a certain fixed or gloating interest rate. The home itself acts as the collateral for the lender; in case of default, the lender can take possession of the home and resell it to cover the costs of the remaining balance.
Like a traditional home loan, a bitcoin mortgage is an agreement between a borrower and lender that allows the borrower to secure funds to purchase with the intent of purchasing a home. In exchange, the borrower agrees to make payments with an agreed interest rate for a specified loan duration.
However, where the bitcoin mortgage differs from a traditional mortgage is in the way the loan is backed. In a bitcoin mortgage, the borrower uses their bitcoin as collateral, allowing borrowers some unique advantages and additional flexibility.
Bitcoin mortgage lenders base their loans not only on the home’s value but on the size of the bitcoin assets you offer as collateral for the loan. By providing this additional backing instead of only a promise of your future income, you give lenders more confidence that they will receive their funds as agreed.
If not, the lender has another asset to cover their possible losses.
How do bitcoin mortgages work?
Traditionally the homebuying process involves rigorous credit checks and hours upon hours of rate shopping, not to mention lots of paperwork. If you have good credit but your partner doesn’t, that could be grounds for suboptimal rates. In addition, your access to credit relies heavily on your cash flow from your job, and these two aspects will dictate where you could purchase a home as the bank will decide what price ranges are worth risking on you.
Bitcoin mortgages, on the other hand, are a little more straightforward. Lenders, in most cases, don’t base the loan terms on your credit score or income or consider how many times you’ve recently applied for credit. Instead, they heavily factor in the size of your bitcoin portfolio.
The more bitcoin you hold, the more equity you can pull out of it in the form of home loan finance.
A typical crypto mortgage works as follows:
- Find a bitcoin mortgage company.
- Complete a minimal application process by sharing some basic details about yourself.
- Share the amount of bitcoin you would like to use as collateral. The larger your crypto holdings, the more you’re able to borrow.
- Select the loan-to-value ratio.
- Choose your desired rate.
- Agree on your monthly payment plan to complete the loan.
- Call the real estate agent or broker and put in an offer on the home.
The key selling points for bitcoin-backed mortgages
Now that you know how a bitcoin-backed home loan works, you’re probably wondering why there is so much interest in the product. So let’s look at the key reasons why certain investors opt for this product instead of traditional home loans.
Some people still feel real estate should be part of their investment portfolio, while others simply require four walls and a roof over their heads; regardless of the intent, people want homes. However, home finance is not accessible to everyone, and as conditions tighten, we see more people fail to meet the requirements to buy a home.
In the case of the millennial generation, incomes aren’t consistent; many are gig workers, freelancer workers or work on a project basis where it’s feast or famine. Instead of relying on a certain income all the time, bitcoin-backed loans allow you access capital from your savings pile.
If you hold a bitcoin and want to get a mortgage, it doesn’t matter if you have bad credit, lack of payment history, or don’t have a six-figure income. So you won’t be haunted by credit demons and bad decisions from your past.
Your bitcoin mortgage is based entirely on the number of bitcoin assets you hold and the loan-to-value ratio you’re comfortable allocating.
One of the major benefits of a bitcoin mortgage is that you’re not required to “cash out” of your bitcoin position. Since you’re leveraging your bitcoin and not selling it, bitcoin loans can have significant tax advantages. Especially for those who have experienced considerable price appreciation but do not wish to take the off-ramp to fiat and pay taxes in the process.
No credit checks
In most cases, you won’t need to have any credit checks done for a crypto mortgage. Again, this can be massively helpful if you have subpar credit or have any high-risk factors traditional home loan lenders look down on.
No credit checks can also help you speed up the process and access capital quickly to close deals before you’re priced out of a market.
The risks of a bitcoin-backed mortgage
Bitcoin mortgages generally show incredible promise, but this is no risk-free trade, and it’s important to acknowledge the downsides. Bitcoin cannot save you from poorly run companies or poor decision-making, so knowing what could go wrong and how to hedge against it is important.
Bitcoin markets are known for their particularly volatile nature, and depending on the terms of your agreement and how far bitcoin can drop during your loan period, you have to accept that there could be times when you might end up in a tight spot. If the bitcoin price drops drastically, it could ultimately affect your loan status.
There is a non-zero risk that you could be liquidated and forced to repay your loan in an accelerated time frame or provide more bitcoin to act as collateral and meet the agreed rations.
That’s why it’s important to only agree to terms you feel comfortable with—consider being conservative in your loan amount to account for downswings in the markets, and allow yourself breathing room by having bitcoin ready should you need to top up your collateral and cash savings should your premiums have to adjust due to the new loan terms.
No control over assets
Similar to when you make a traditional down payment, the bitcoin you use as collateral cannot be used; it remains idle for the duration of the loan. Once held as collateral, you won’t be able to access those funds until either certain ratios are met or you’ve reached an agreement to refinance the loan.
If most of your net worth is in bitcoin, it’s important to factor that into your decision and size your positions accordingly.
Furthermore, if an asset you use as collateral jumps in price, you cannot realise those gains. However, again, refinancing of the loan at the new value of the collateral could be possible, depending on the lenders’ terms.
Not your keys, but your custodial risk
One aspect of bitcoin mortgages that may not sit well with bitcoiners is the custodial risk involved, with many of these firms requesting that you hand over ownership of your funds to back the loan they provide. While you might be making your payments on time, you have no idea if the firm is solvent, and if they go bust, they could take their bitcoin along with you, as we’ve seen with many CEFI lenders in the last five years.
In future, this could be mitigated with the use of a multi-sig escrow account that requires signing by several parties to access or move funds. It also would provide oversight to all parties that funds are where they should be and that no rehypothecation is taking place.
Where can I get a bitcoin-backed mortgage?
Bitcoin mortgages are relatively new, with only a few service providers willing to accept bitcoin as a backing for a home loan. Still, as the liquidity flowing into bitcoin improves with time, it will only open up more markets, especially in regions where the local currency depreciates rapidly and interest rates are higher to try and slow down the devaluation of the currency.
Instead of dealing with the interest rates set by your local central bank, you could opt for the going interest rates on a bitcoin mortgage and save yourself some money.
If you’re interested in learning more about bitcoin home loans, check out the following service providers operating in the bitcoin mortgage market.
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Have you backed your home with bitcoin?
Bitcoin-backed mortgages are one of the latest innovations in the financial market to try and encourage bitcoin holders to use their bitcoin for capital creation, in this case, acquiring a home or securing exposure to the real estate market.
Instead of simply holding your bitcoin in cold storage, you’re leveraging the value parked in that bitcoin to acquire either the utility of a home or a future cash flow-producing entity you can use to generate an income.
Bitcoin does have a significant potential to appreciate through its scarcity and its built-in number go-up technology. As the price appreciates, bitcoin holders will have more unrealised value sitting in their wallets.
Holding bitcoin is one part of the process but accessing that wealth is another story, depending on the country you live in and the tax rules. If you are in a part of the world where accessing your bitcoin would leave you with a hefty tax bill, it may be wise to look at options that allow you to leverage the value or extract equity.
In some cases, it might be advisable to use your assets as collateral for a cash mortgage instead of selling them and incurring tax liabilities or missing out on potential gains.