Buy A House Using A BTC Mortgage Loan
Bitcoin is regarded as the hottest investment asset of our time. No wonder – the world’s first cryptocurrency based on open blockchain technology has caused a sensation in the last 10 years, since it was brought to life.
While Bitcoin was mainly known among Internet nerds in the early years, the digital currency has not only made it into the mainstream media in recent years – thanks to its epic price trend, it has even become a serious investment, even at Wall Street. Day traders and swing traders are particularly pleased with the volatility.
Skip to Bitcoin Mortgage Offers
As Bitcoin now plays a role in global financial markets, there are more and more applications for the digital currency. These include financial services such as issuing loans against Bitcoin (BTC).
This option is particularly interesting for people who have a relatively large amount of Bitcoin but a lack of cash. Those who do not have the necessary capital for a larger investment in USD, but hold a lot of BTC, can now take advantage of the possession of a larger amount of cryptocurrency.
That’s exactly what the famous actor and entrepreneur Brock Pierce (known from “Mighty Ducks”) did in 2018. The US-American bought a house worth $1.2 million in Amsterdam, Holland, which he financed with a Bitcoin loan. Instead of paying the property directly with Bitcoin, which is already possible at some places, Pierce took out a loan against Bitcoin. For this purpose he had to stake double the USD value in Bitcoin as collateral.
This story caused a sensation because it was the first known case worldwide where someone took out a larger loan exclusively against Bitcoin to buy real estate.
The case laid the foundation for a Bitcoin Home Loan market.
How exactly do Bitcoin Home Loans work?
If you take out a loan against Bitcoin, e.g. as a Bitcoin Home Loan, you have to stake about twice the amount of value in BTC depending on the lender.
If e.g. Bitcoin is trading at $10,000 and you want $100,000 cash, you have to deposit about 20 BTC, i.e. a value of $200,000.
This is of course due to the high volatility of Bitcoin. You have to reckon with the cryptocurrency that it could lose half its value during the loan term. This leeway is therefore simply included in the calculation.
What would happen if the Bitcoin Price dropped too deep during the Loan Term, i.e. by at least 50%?
If the ratio of credit to countervalue (also called “loan to value ratio” = the amount you get in USD in relation to the BTC in stake) no longer fits, liquidation would be imminent. This means that the lender would then be forced to sell BTC at $5,000 to recover his $100,000. Perfectly logical.
However, the borrower is warned before that would happen. The deposited BTCs are therefore not simply sold all of a sudden, without warning.
The lender will make a Margin Call in time. This means that the borrower will be contacted and asked for action to avoid liquidation. You then have 2 options:
- you can refill BTC to bring the loan-to-security deposit ratio back to a reasonable value.
- Or you can repay the loan immediately to protect the lender from a loss.
Advantages of a Bitcoin Home Loan
You don’t have to sell Bitcoin
The good thing about a Bitcoin home loan is that you don’t have to sell your Bitcoin to get cash.
Especially Bitcoin HODLers, who speculate on a rising price in the long run, don’t want to have to sell their BTC. Because with a sale it is gone for good. With a Bitcoin loan, your BTC is only frozen for a while, but you basically keep it.
No Tax
The disbursement of a Bitcoin loan does not have to be taxed, unlike a real sale of Bitcoin. If you actually sold BTC, you would have to pay capital gains tax or income tax, depending on how long you held it. This is of course not the case with a loan disbursement.
If you compare the interest you have to pay on a Bitcoin loan and the tax you’d have to pay on an actual Bitcoin sale, it’s a pretty good deal: In both cases you pay quite a lot, be it interest or tax – but in the case of the loan you keep your Bitcoin!
Instant credit
For traditional bank loans, it is usually necessary to make an appointment with the bank to check, among other things, creditworthiness. So applying for a bank loan involves some effort, and the creditworthiness can be a point at which the loan fails.
With a Bitcoin Loan it is completely different. Bitcoin loans are instant loans, i.e. you can take them out online and get your money immediately as soon as the BTC are deposited with the custodian.
No Credit Check
The good thing is that you get a Bitcoin home loan without a credit check. For the Loan Service, the financial history of a customer is irrelevant. By depositing the BTC, the company has enough security from the customer.
The terms of the various Bitcoin Home Loan providers vary slightly, so we will look at them in comparison:
1. BlockFi
Term Length:
12 months
Loan-to-Value Ratios:
up to 50%
Interest Rates:
From 4.5% annual interest rate
Minimum Loan:
$10,000
Maximum Loan:
$10,000,000
2. CoinLoan
Term Length:
up to 3 years
Loan-to-Value Ratios:
up to 70%
Interest Rates:
From 4.95% annual interest rate
Minimum Loan:
$100
Maximum Loan:
unlimited
3. Nexo.io
Term Length:
12 months (standard; may be renewed upon request)
Loan-to-Value Ratios:
up to 50% (for BTC and ETH; different for other cryptos)
Interest Rates:
From 8% annual interest rate
Minimum Loan:
$500
Maximum Loan:
$2,000,000
4. Unchained Capital
https://www.unchained-capital.com
Term Length:
3-60 months
Loan-to-Value Ratios:
35-50%
Interest Rates:
Minimum Loan:
For US citizens: $10,000+
For international borrowers: $100,000+
Maximum Loan:
n.a.
Comparing Such Bitcoin Mortgage Loans to Traditional Mortgages
A Bitcoin Home Loan can also be referred to as a Bitcoin Mortgage Loan.
In general, a Mortgage Loan is a loan you can get against a collateral. This collateral can be a property, (the case most people know,) but it can also be gold or other assets or insurance.
So a Home Loan is a special type of mortgage loan because it stipulates that the borrower’s house is the pledge. If the borrower is unable to pay the loan installments in the long run, the bank can sell the house and get its money back.
This Investopedia page provides an incredibly good, easy to understand explanation of how mortgages work and why many people lose their homes in financial crises. In particular, you get to know the different types of M.L. and under which circumstances they are risky.
How Bitcoin Loans are less risky than traditional Home Loans
The good thing about a Home Loan against BTC is that you don’t have to pawn your house. You can buy a house on credit, and don’t risk that it belongs to the bank if you can no longer pay the interest rates or make the final repayment. This makes sense in case it is the most important point to you not to lose your home. Of course, with a BTC Loan you are at risk to lose your BTC instead.
An important point mentioned in the Investopedia article is that most people do not live longer than a few years in the house for which they are taking out the mortgage loan. And that it is therefore not wise to choose a particularly long loan term as this significantly increases the total lifetime cost of the loan (principal + interest).
Precisely because of this average very short life of the house, a Bitcoin Mortgage Loan can be particularly advantageous. Here the maximum term is 5 years. You could sell the house in the 5th year, for example, and thus repay the complete loan and in addition you would also get your Bitcoin back. So you would live in a house that doesn’t belong to the bank if you can’t pay the loan anymore. In this case you would lose the deposited BTC, but not your house.
Disclaimer:
This article is not investment advice. It is only a compilation of information, which corresponds to the level of knowledge of the author. We assume no liability for the accuracy of the contents of this article. Furthermore, we do not provide any financial advice on this website. Please do your own research before making an investment decision or consult with your financial advisor.