What Are Crypto-backed Mortgages?

The crypto-backed mortgage is a loan concept that involves the use of cryptocurrency assets such as Bitcoin and Ether as collateral to obtain standard mortgage loans. The idea gained more traction and became more relevant as the cryptocurrency industry continued to gain global adoption.

In crypto-supported mortgages, the crypto asset value determines the loan amount, and the assets are kept as collateral, which would be returned in full to the borrower once the loan conditions have been met. The use of blockchain features such as smart contracts helps to facilitate and secure these mortgages.

However, are crypto-back mortgages safe? Are there any risks or benefits of using this type of loan? In this article, we will discuss the common types of cryptocurrency-backed loans and the benefits and risks involved.

Types of Cryptocurrency Mortgages

The following are the common types of crypto-backed mortgages:

• Purchase mortgages: They are used to finance real estate as borrowers leverage crypto assets as collateral.

• Cash-out refinancing: Homeowners who have active mortgages can refinance their properties by using their digital assets as collateral to collect more loans for multiple reasons.

• Bridge loans: in this case, Borrowers collect bridge loans to close the gap between selling an old property and buying a new one using their crypto holding as collateral. The loans are usually short-term.

Crypto-backed mortgage benefits

A crypto-backed mortgage is relatively a new financial tool that enables borrowers to use their digital assets to collect a traditional loan or mortgage. Below are some of the benefits of crypto-based mortgages:

• Liquidity Access: crypto-based mortgages enable users to access liquidity using their cryptocurrencybenefit from future price appreciation

• Tax Efficiency: when you sell crypto assets, it can trigger capital profits taxes. However, when you use your digital assets as collateral, you won’t be obligated to pay any taxes, hence helping you boycott taxation.

• Diversification: Cryptocurrency-backed mortgage helps you diversify your digital assets portfolio as you use them as collateral to get properties or funds to perform other functions without liquidating your assets.

• Lower Interest Rates: With crypto-backed loans, borrowers often pay lower interest rates than traditional loans. This is because the digital assets used as collateral have drastically reduced the lender’s risk.

• No Credit Checks: when obtaining traditional loans borrowers’ credit history is often considered before issuing the loan. However, in crypto-backed loans, credit history is not needed, making it more accessible for individuals with poor credit histories and those residing in developing and underdeveloped nations.

• Holdings as collateral. However, this concept allows borrowers to retain 100% ownership of their digital assets, enabling them to. However, this concept allows borrowers to retain 100% ownership of their digital assets, enabling them to: crypto-backed loans give borrowers flexible options to pick, including fixed/variable interest rates, loan amount, and repayment conditions, allowing them to choose options that suit their financial capabilities.

• Quick Approval: Crypto-backed mortgage borrowers often receive approval for their applications and access loans faster than traditional loan systems.

• No Property Appraisal: when applying for crypto-backed mortgages, borrowers do not need any property appraisal, unlike Traditional mortgages where property appraisal is compulsory ( consuming more time and costs).

• Global Accessibility: Crypto-backed loans can be approved in any geographical region, allowing borrowers to get loans from any country.

Crypto-backed Mortgages Risks

As enticing as the benefits of crypto-backed mortgages are, it is essential that you consider the risks involved before applying for a loan. Below are some of the common crypto-based loans risks;

• Volatility Risk: digital assets are plagued with high price volatility; hence, if the price valuation of the crypto assets a borrower uses as collateral declines, he might face risks of a margin call or his asset will be liquidated.

• Collateral Liquidation And Margin Calls: collateral liquidations often occur when the loan-to-value ratio of a deal drops below a specified threshold, authorizing the lenders to liquidate the crypto assets of the borrowers. If collateral liquidation does not occur after the threshold has been triggered, a margin call may occur. In this scenario, the borrower has to provide more collateral or pay a portion of the original loan.

• Interest Rate Risk: sometimes, the interest rates on crypto-supported mortgages can be variable or pegged to crypto market conditions. This means that borrowers may face higher interest costs if rates increase.

• Regulatory Risk: The regulatory environment for cryptocurrency loans and mortgages is evolving. Changes in regulations could impact the legality and terms of crypto-backed loans.

Conclusion

Individuals should assess the whole risk-to-reward ratio when deciding whether getting a mortgage is a good idea in their current situation. The risk-reward ratio compares the potential profit of an investment to its potential loss. It is calculated by dividing the projected gain by the expected loss, and it assists investors in deciding whether a business opportunity is worth pursuing based on the ratio of prospective returns to probable losses.