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What are crypto-based mortgages?

Crypto-backed mortgages are a kind of loan where borrowers use their cryptocurrency holdings, such as Bitcoin (BTC) or Ether (ETH), as collateral to secure financing for real estate purchases. This approach allows you to access funds without selling your digital assets. By retaining crypto ownership, borrowers can still benefit from future price increases.

There are various types of crypto-backed mortgages: purchase mortgages, cash-out refinancing and bridge loans. 

• Purchase mortgages: These help you finance real estate using crypto as collateral. 
• Cash-out refinancing: It allows you to refinance your existing mortgages by leveraging your crypto assets to access additional funds. 
• Bridge loans: These loans provide short-term financing, helping you cover the period between purchasing a new property and selling an existing one.

Crypto mortgages are particularly appealing if you want to preserve your holdings while securing real-world assets. However, you need to consider the volatility of cryptocurrencies and carefully assess the risks before opting for a crypto-backed mortgage.

Lenders usually accept stablecoins such as Tether (USDt) and USDC (USDC) or major cryptocurrencies like BTC and ETH. Some lenders may accept a diversified portfolio of cryptocurrencies as collateral, which is known as cross-collateralization.

Did you know? With traditional mortgages becoming increasingly difficult to obtain, particularly for younger individuals, alternative solutions are gaining traction. Fintech startups are addressing this demand by offering adjustable or fixed-rate mortgages secured by substantial cryptocurrency holdings.

Crypto-based mortgages vs traditional mortgages

Crypto-backed and traditional mortgages differ from eligibility requirements to risk factors. Traditional mortgages rely on credit history, income verification and down payments, while crypto-backed mortgages use digital assets as collateral. 

The approval process for crypto mortgages is often faster, but they come with higher interest rates and volatility risks. Additionally, regulatory uncertainties make crypto-backed loans less widely accepted in real estate markets. A comparison of the two mortgage types is given below:

How do crypto-backed mortgages work?

The basic mechanism of crypto-backed mortgages is that depositors calculate the value of the crypto the borrower proposes to collateralize and release a loan against the amount. 

To assess the value of the crypto assets, the lenders may apply a loan-to-value (LTV) ratio, which indicates the percentage of the collateral value you can borrow. 

For example, if the LTV ratio is 50%, you can secure a loan of $25,000 for collateralized crypto assets worth $50,000. Overcollateralization helps to create a buffer, which helps the lender if the value of the collateral goes down. Smart contracts are used to automate the execution of loan terms. 

Here is a step-by-step look at the functioning of crypto-backed mortgages: 

• Step 1: Find a lender – Look for a financial institution or decentralized finance (DeFi) platform that offers crypto-backed mortgages. Compare different lenders based on their interest rates, fees and supported cryptocurrencies.
• Step 2: Apply and submit proof of ownership – Submit an application for getting a loan against the crypto you hold. You also need to provide proof of ownership of your digital assets. The lender will assess the worth of your crypto holdings to determine your borrowing limit. Some lenders may consider other financial factors, such as credit history.
• Step 3: Move crypto to escrow account – Once approved, you need to pledge the required amount of crypto by transferring it into an escrow account. This crypto acts as security for the mortgage loan. 
• Step 4: Prep the loan – Complete the loan agreement, which outlines key terms like repayment schedules, interest rates and what happens if your collateral’s value drops. Usually, if the value of the crypto drops, you will need to deposit more crypto in the escrow account so that the loan remains overcollateralized. If you fail to deposit additional crypto, the lender may liquidate your crypto deposits.
• Step 5: Disbursal of loan – The loan funds are typically disbursed in fiat currency for purchasing the property.
• Step 6: Make mortgage payments – Repay the loan according to the agreed terms. The interest rate may differ in line with the market value of the collateralized crypto.
• Step 7: Recover your collateral – If you complete all payments as per the loan agreement, you will get back your cryptocurrency from escrow. If you fail to repay it, the lender may liquidate your collateral to cover the outstanding amount.

Did you know? Freddie Mac data shows that…