Take a guess which year this was written:
When asked which payment method they used most often, 43% of Singaporeans preferred cash, as compared to 3% who used mobile wallets, and 2% who used contactless payments.
If you’re anything like me, you’d be shocked to learn that this survey was conducted in 2017. That’s just 5 years ago!
And just a year before that in 2016, people were concerned with the security of e-wallets, with articles even claiming that “digital wallets are likely to end up becoming alternative players”.
This could not be more wrong today, as the future of payments is most definitely digital.
It was at that same time in 2017 that I first used the QR code to make my first PayNow payment buying a cuppa joe, and it seemed clear to me back then that physical cash would be a thing of the past.
Today (spurred on by the pandemic as well) it’s become the norm for me and so many others.
And so if there’s anything to learn from the above, it’s just how quickly trends and technology can catch on.
This brings me to my main topic today – crypto mortgages.
So what are crypto mortgages?
Basically, it allows you to finance the purchase of real estate with a loan that is backed by bitcoin.
Getting The Basics Straight
Different lenders will tell you different things, but essentially, crypto mortgages are a way for you to receive liquid funds without selling the coins you own. There are CeFi & DeFi loans too.
Here’s the situation though.
Given that bitcoin still has the potential to go up in value (although hard to see now since the Crypto market is a sea of red!), those who are looking at buying a home but have their wealth tied up in bitcoin will find it hard to sell their bitcoin to fund their real estate purchase.
You know, it’s an opportunity cost type thing. The fear is always that the value of bitcoin suddenly shoots up in the next few months while your property purchase stays stagnant.
So with crypto mortgages, you can now use your digital assets as collateral to receive either cash or stable coins as a loan. One alternative to this is that you can convert your digital “money” to fiat cash, but that comes with its own tax consequences.
By pledging your crypto assets, you’ll have to pay the amount off over a certain agreed tenure. This could be over something like 30 years.
CeFi Crypto Loans vs DeFi Crypto Loans
CeFi (Centralised Finance) crypto loans depend on a central entity to take custody of the collateral. This means that by pegging your crypto coins, you cannot access your collateralised assets.
DeFi (Decentralised Finance) crypto loans use smart contracts instead of a central entity. You’ll still have control over the coins that you peg unless you default on the loan. However, it does not provide cash directly to you. Instead, you receive stable coins (e.g. USDT, UST, DAI) that are less volatile, which you can then use to exchange for cash. The downside to this is that it has higher IR than CeFi loans.
Other schools of thought include using blockchain technology to transact the deal instead of traditionally exercising the deal, which we all know takes forever and is pretty inefficient.
Traditionally, borrowing against your crypto would require you to continuously refinance your loan. But companies like Milo (NOT THE MALT DRINK), ledn, Abracadabra, Alchemix, and Figure have solved the issue, allowing borrowers more time to build their wealth through investing in real estate (as said by Milo’s CEO, Rupena).
However, there are definitely its own sets of risks. Even Rupena affirmed that regular investors with no high-risk tolerance should give this new mortgage a miss. The volatility of the coin’s value and lack of understanding of the real estate market could be your major pit falls. Don’t bite off more than you can chew.
Currently, Milo and Figure offer 100% loan of your cryptocurrency value with no downpayment required. Milo offers loans up to US$5M and accepts BTC, ETH, and stablecoins, whereas Figure offers a maximum mortgage of US$20M and accepts BTC and ETH.
Before approving any loan, your full credit profile will be assessed – how much debt you have on your car, your credit card, and other liabilities.
Thus far, 63 countries already have these crypto-mortgage transactions including USA, Canada, UK, Argentina, and Mexico. Singapore has her own share of co-investing in real estate investing via blockchain tech too.
With how prevalent technology is in our lives today, it’s great to know that this concept is becoming more accessible. While regulations everywhere are different, it’s a good alternative to have and a big step forward for cryptocurrency and its legitimacy.
Weighing the Pros & Cons
Pros
Pro 1: More Potential for Wealth Growth
The main attractive feature for me was that you don’t have to sell your coins as collateral for your home mortgage – this means that there won’t be any gains tax (depending on your crypto situation as indicated by IRAS) and you could be saving an amount from just using crypto to purchase.
For those who like to HODL for a long time to see capital growth instead of a short-term stint, this could be a very good thing too. If you are adamant about the growth of bitcoin in the future, this allows you to have the best of both worlds.
As an aside, here’s a Reddit post explaining how you could possibly liquidate your crypto assets in a “smarter” way for the long run.
Thoughts? I’d also like to point out that this doesn’t take into consideration any BTC or ETH gain in values.
Pro 2: Lower Barriers of Entry
Technically, you can’t use your crypto to justify your financial situation and this holds true for many countries. Now, you can justify your loan with your portfolio, although other considerations like your credit score and ability to repay the loan will be considered as well.
Pro 3: Fast Funding
Crypto loans are much more streamlined. Once approved, you can get your loan in a matter of a few hours to a few weeks – that’s definitely faster than the traditional route.
Pro 4: Payment Payable by Fiat or Coins
Depending on the platform you use, you can receive loans from these companies via fiat or stable coins. The same goes for your payment for the mortgage every month.
Cons
Con 1: Unstable Coin Values
This is definitely one of the major deterrents to mass adoption of mortgages via coins – the value is so volatile every day. This puts mortgagees in a tight spot for risk.
For example, if you use ETH to pay for your 3rd property and ETH fell 30% the next week, the interest rate on your property will be higher. Not just that, you’d have to table out more crypto to prop up the collateral.
Seeing how the crypto market has been playing out the past few days, it’s even clearer to see just how much of a risk it can be when the market is so unpredictable.
Con 2: Forced Liquidation
Like any mortgage, if you don’t pay your crypto loan, you might find your coins being liquidated by the lender to recoup the company’s losses. In that case, you might be subjected to tax depending on your timeline of liquidation. Do check with a tax professional to confirm!
Con 3: Cyber Security
One thing for sure that is a cause for concern is the number of scams and hacking that could potentially happen on this platform. There will always be a technical problem or risk to this.
As an example, I remember transferring some of my coins from Binance to my other wallet and some of the coins got lost during that process.
It also boils down to the platform’s standard of Know Your Customer (KYC) regulations to prevent any potential scammers and offenders from joining.
Con 4: Higher Interest Rates
Interest rates for regular loans have been rising, but you will also be facing a higher interest rate for crypto mortgages.
As an example, Milo offers interest rates for crypto mortgages of between about 4% and 6%.
Final Thoughts
As someone with the majority of her assets in the crypto space, I do think that this could be a great opportunity to merge digital and physical assets. In a way, it makes crypto much more “tangible”.
In Singapore’s context, big banks that we are familiar with, like Citibank and DBS are entering the metaverse, and everyone knows that one of its core pillars is cryptocurrency. Every small step is a way forward to pave our adoption of using cryptocurrency as a form of payment.
As we see more headlines like this, I can imagine how ‘normal’ it would be to see cryptocurrency integrated into our daily lives. New ways like these could potentially bring you closer to long-term wealth through unconventional incomes.
I do see that there will be big hurdles to its acceptance – but I do know the world is transiting in that direction.
Maybe the question in the future will be “Which Coin Is Best to Take Up Your Mortgage”, rather than “Why Use Crypto?” Who knows?
Hope this quick read was insightful. See you in the next post!
At Stacked, we like to look beyond the headlines and surface-level numbers, and focus on how things play out in the real world.
If you’d like to discuss how this applies to your own circumstances, you can reach out for a one-to-one consultation here.
And if you simply have a question or want to share a thought, feel free to write to us at stories@stackedhomes.com — we read every message.
1 Comments
Hi Cheryl,
Loved the way you broke down the points surrounding Crypto Mortgages. Have been following your articles closely.
Would love to get connected to speak more around these topics!