Cryptocurrency mortgages: is it worth the risk?

Cryptocurrency mortgages: is it worth the risk?

Mortgages are a classic option for buying real estate in the civilized world. But technology does not stand still: U.S. residents already have access to an advanced mortgage option – in cryptocurrency. Fintech startup Milo offers its clients loans for the purchase of housing in bitcoins. And the demand is there.

However, experts do not share the enthusiasm of crypto-maximalists and advise potential buyers to carefully study the terms of such contracts before signing them. What causes the skepticism of real estate market participants? Is the service really underdeveloped and carries excessively high risks for consumers? Let’s sort it out together.

What’s the problem?

The key problem of the “world’s first” crypto-mortgage is obvious: the owner of the property acquired through this service, has no ability to dispose of “their” property. Until the moment of full repayment of the mortgage loan, the person has no full control over his/her purchase.

Moreover, in addition to the impossibility of selling/transferring such housing to other people, the collateral for it will not be returned until the full payment on the loan obligations. Another unpleasant surprise for potential customers is the requirement of the size of the collateral. In order to qualify for a mortgage, one must own bitcoins in an amount that completely exceeds the purchase price.

Milo parries the criticism with the claim that their service helps “preserve” bitcoins until the loan is paid off in full. They say that over time their value will only increase, guaranteeing customers a solid profit. The conventional purchase option deprives them of that opportunity – they would have to sell the necessary amount of cryptocurrency to buy a house or apartment for cash.

“Our way helps the consumer stay invested in cryptocurrencies, accumulating income as they grow. At the same time, we offer the ability to buy real estate,” explains Milo CEO and founder Josop Rupena in a February interview with Insider.

For the sake of fairness, it’s worth noting – mortgage rates are now at their peak in comparison to “pre-pandemic” levels. And there is an oversupply of demand in the market: all available offers are immediately bought back for cash.

According to NAHB, the National Association of Home Builders, only 54% of homes for sale in the second half of 2021 were affordable to middle-income families. That’s the lowest rate since 2012. The average fixed rate on a 30-year mortgage rose to 3.69% APR, significantly higher than the year before (2.68%). Adding to all of this is the highest inflation rate in 40 years.

This situation has pushed up the average sales price of a home by 16% since the beginning of 2021. It has reached a record high of $356,000. At the same time, the number of residential real estate offers for sale fell by 9.1%. Only 25 percent of new homes sold for under $300,000. By comparison, in 2018 the figure was 42%. Clearly not enough homes are being built. Existing demand remains unmet. And the available supply on the market is too expensive for the average American.

That’s why crypto-mortgages seem like a tempting option for some potential buyers. Especially when you consider that in 10 years the value of bitcoin has increased by 90,000 times. However, no one can guarantee the continuation of this trend. Cryptocurrencies are still a high risk investment.

Erin Sykes, chief economic advisor at Nest Seekers International, believes this kind of lending model is hardly attractive to the average borrower.

“Cryptocurrency investors tend to be willing to take a lot of risk for the sake of high returns. They don’t react as emotionally to various market fluctuations. At the same time, regular people prefer stability – even at the expense of potential income. I think for most borrowers, this service will remain unclaimed,” Sykes says.

How it works

People with an amount in cryptocurrency equivalent to the value of real estate can sign a mortgage agreement with Milo for up to 30 years. Similar to a traditional mortgage, where savings, other property or an investment account serve as collateral, a crypto mortgage offers the same terms:

A fixed interest rate for the entire term of the loan;
payments are designed for a long-term period;
the possibility of buying a home on both the primary and secondary markets.
After a prospective client applies for a mortgage, Milo analyzes whether the borrower meets all the requirements. Instead of assessing a person’s ability to pay by declared income or FICO (credit rating), it uses an analysis of the value of their cryptocurrency portfolio. Unlike traditional U.S. mortgages, borrowers do not have to make a down payment in cash. Instead, Milo pays the full amount to the seller, and the borrower’s cryptocurrency is deposited with a third party.

Then everything happens exactly as with an ordinary mortgage. The company receives income in interest on the loan, the borrower makes timely payments. In case of default, the real estate is removed for sale in order to reimburse the remaining amount of the mortgage. If the owner wants to sell or donate the mortgage property, they must first repay the entire debt to Milo.

Why aren’t crypto-mortgages for “regular” people?

Although Milo claims to be the first financial institution to use cryptocurrency-backed mortgage lending practices, the concept is far from new. For several years now, companies like BlockFi, Avalanche, Nexo and others have allowed loans secured by virtual assets. Milo can only be considered a conventional pioneer in the mortgage lending market.

According to Rupena, previously people using loans secured by cryptocurrency had to constantly refinance loans. The company he leads has built a business model that does not require periodic refinancing. This approach guarantees borrowers a greater level of stability:

“We give them the opportunity not just to get rich, but to buy real estate while their capital grows,” he says.

Rupena admits – crypto-mortgages are clearer and closer to investors in virtual assets or those who don’t have many options to “monetize” digital wealth.

“It’s a great option for those who have a high risk tolerance, believe in further strengthening cryptocurrency, and are not yet ready to sell coins,” he echoes Erin Sykes.

But for ordinary citizens, this option of buying a home looks too risky because of the volatility. Don’t forget – if the price of bitcoin falls, the interest rate of payment automatically goes up.

“I think people who are able to take out a mortgage on traditional terms due to having a stable income and meeting all the other criteria should definitely take advantage of a conventional mortgage,” Rupena said.

Milo declined to publicly announce the number of clients. Rupena only agreed to give the total amount of loans issued ($400 million) and the number of potential borrowers whose applications are under consideration (7,000 people).

It’s too early to say how much demand for mortgage lending services secured by cryptocurrency in the long term. The market for this asset class is too volatile.

For those who do decide to use the service, it is worth taking care to have a “reserve” fund. It will be necessary if the value of collateral will strongly depreciate. It will be necessary to supplement the collateral to the necessary amount to avoid automatic liquidation.

In other words, the very principle of such collateral is clear today, but its benefit for borrowers and competitiveness in the market remain unknown values. Only time will determine the feasibility of crypto-mortgage.

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