What Are Crypto-backed Mortgages and How Do They Work?

Cryptocurrency seems to be everywhere, doesn’t it? People use the blockchain for products as diverse as refrigerators and Thanksgiving turkeys, so it’s no surprise that some mortgage lenders are getting into the crypto game.

Crypto mortgages allow borrowers to use digital currency as collateral for their real estate purchase. While these mortgage products can be a good option for potential homebuyers who feel more confident in their crypto holdings than their credit history, the uncertainty of the crypto market could mean more risks than a traditional mortgage.

How Do Traditional Mortgages Work?

To understand how crypto mortgages work, you must be fully familiar with traditional mortgage loans. On a basic level, a mortgage is a home loan that uses the property as collateral.

Unless you have more liquidity than Aquaman and hundreds of thousands (or millions) of dollars lying around, you need a mortgage to purchase a home. There are many factors that determine whether you can qualify for a mortgage, the loan amount, the down payment, and the interest rate.

Different mortgage lenders have different application requirements, but your assessment generally depends on your debt-to-income ratio, employment status, credit score, and other factors that prove your ability to handle years of monthly payments.

If you’re struggling to qualify for a traditional mortgage, you could consider asking a friend or family member to be your cosigner, but this holds them liable if you miss your mortgage payments.

Alternatively, you could take a peek into the world of crypto lending.

How Does Crypto Work?

Okay, so we explained how mortgages work, but that’s only one half of crypto mortgages. The other half involves a blockchain, which is a virtual network that tracks digital assets.

A blockchain keeps track of information across an entire network rather than in one location. While this is not the place for a super technical nuts and bolts explanation, the goal is to create a system that no one person or institution can control.

One common blockchain application is cryptocurrency. You likely know of Bitcoin (btc), the first and (as of November 2023) most valuable cryptocurrency. The next most popular crypto coin is Ethereum (eth), with Tether following behind (usdt). Tether is a stablecoin, meaning that it’s (theoretically) pegged to and backed up by U.S. Dollars.

These are only a few of the tens of thousands of cryptocurrencies available today, with more in production. Cryptocurrencies led to the creation of crypto lenders, including crypto-backed mortgages.

How Do Crypto-backed Mortgages Work?

Crypto mortgages are mortgages that use crypto assets as collateral. As with other types of collateral, the lender takes the currency if you don’t make repayments.

According to Jon Morgan, CEO of Venture Smarter, crypto loans are a “game changer for those who have substantial crypto assets but need liquidity for other investments, like buying a home.”

As mortgages become harder to secure – especially for younger people –it’s not surprising to see potential homebuyers looking for out-of-the-box solutions. To help service this market, there are fintech startups out there that provide adjustable or fixed-rate mortgages for borrowers willing to put up significant crypto holdings as collateral.

If a borrower is able and willing to put up enough cryptocurrency, they might even avoid a down payment. However, crypto mortgages also come with their own unique risks, such as market instability in a young and evolving marketplace.

Should You Consider a Crypto Mortgage?

Traditional mortgages are a complex and major commitment. Crypto mortgages can be even more complex and require commitments that many crypto holders may struggle to keep.

However, there can be an upside for tech-saavy individuals who are already involved in the marketplace, Morgan says.

Gary McFarlane, financial analyst for Crypto News, talks about additional benefits:

“The advantage for someone who has a large holding of crypto is that there is no need to sell your crypto if you are 'holding' (crypto-speak for holding for the long-term) in the expectation of the price of your crypto assets appreciating in the future.”

By using a crypto lender, borrowers can secure a mortgage without having to cash out their crypto assets. That means they don’t have to pay capital gains tax or forego future gains if the value of their cryptocurrency continues to grow.

Note the “if.”

If you receive approval for a fixed-rate traditional mortgage, you know in advance what you’re signing up for. There are specific monthly payments that stay consistent across the entire loan term. Adjustable-rate mortgages, on the other hand, have low interest rates at first but can increase later. These adjustments can have limits, though, so you still know the maximum commitment you might be making.

Crypto mortgages do not have this guarantee.

“If you bought a property in 2021 at the height of the last crypto bull market, then the value of your collateral will have fallen considerably,” warns McFarlane. “Such an eventuality may trigger a margin call from your lender, in which you are asked to provide more assets as collateral for your existing loan.”

Crypto investors are presumably used to dealing with a greater level of uncertainty than the average consumer, but you should be extra cautious when your home is on the line. You should also be especially careful when using a crypto lender to refinance a traditional mortgage. While using your existing crypto assets to access better rates might sound appealing, sudden market shifts or new regulations could cause you to lose your home and digital assets. For either type of transaction, it would be wise to speak to an experienced mortgage professional about your objectives and risk-tolerance level can help you make an informed decision about your mortgage options.

How Will Blockchain Technology Impact Mortgages in the Future?

Hopefully, you now have a sense of whether a crypto mortgage is an option worth considering for your financial situation. But what does the future of blockchain technology hold for the mortgage space?

Morgan sees a lot of potential for blockchain in the real estate market.

“Blockchain, with its transparent and secure nature, can streamline the entire real estate transaction process,” he says. “From verifying property titles to handling escrow services, blockchain can significantly reduce fraud and streamline the paperwork, making the experience smoother for both buyers and sellers.”

McFarlane thinks the technology could allow for new ownership structures in the future.

“Assuming the regulatory landscape becomes less uncertain and a solid legal framework is established, then tokenization can be expected to make inroads into the space,” he says. “Where previously a mortgage would usually be taken out to buy a single property unit such as an apartment or a house, crypto could change all that. Tokenization means that a single property can be subdivided into fractional parcels, allowing there to be many potential co-owners of a property.”

At the same time, McFarlane acknowledges that the legal framework does not yet exist, and he questions whether current real estate professionals are interested in adopting the technology or if they see it as a threat to their role.

The Bottom Line: Be Sure to Research Your Mortgage Options

No matter your financial situation or access to crypto assets, you should do your research before signing on to a mortgage. Any mortgage is a long-term commitment, so even if you aren’t considering the crypto route, you still need to look at all of your options. And if you are, you need to be aware of any regulations or risks that may accompany this type of transaction.

Talk to different lenders and learn which one can offer you a good deal with a repayment plan that works for you. You should also consult with your mortgage advisor or real estate agent to determine what makes the most sense, given your plans for the property. They likely have different suggestions depending on if you’re planning to settle down or use the property as an income source.

It’s also possible that this might not be the right time to apply for a mortgage. You could consider waiting until mortgage rates are lower or until your credit is higher. No matter what option you decide, the joy of a new home can be exciting, but you want to be certain you’re making the choice that’s right for you.