Understanding Crypto-Backed Mortgage Loans

 Understanding Crypto-Backed Mortgage Loans

From the Adoption of Spot ETF and subsequent events that has occurred in the crypto sphere (Bitcoin Halving) it appears the use of Crypto/Digital Assets is gaining momentum.

The idea of using digital assets as collateral against traditional loan products such as mortgages has gained traction as the value in the crypto markets has grown over recent years. They offer a way to leverage the value of a digital asset portfolio to access credit without having to liquidate the assets themselves. The problem faced with this development is the inconsistency in Crypto or digital assets value and it's Varied Fluctuations. This work highlights the growth of Cryptocurrency adoption as a means of secured lending.

How do crypto-backed mortgage loans work?

A crypto-backed mortgage agreement requires that the borrower deposits cryptocurrency as collateral into an escrow account so that it can be used to guarantee the repayment of a mortgage loan.

The first step is to find a lending company or DeFi lender that accepts cryptocurrency as collateral. Since the concept of crypto-backed mortgages is still very new, it may require some shopping around to find a reputable provider with competitive lending rates and terms.

It may be necessary to prove ownership of the digital assets to be used as security as part of the application process. In any case, the lender will determine how much can be borrowed based on the available collateral. The loan value may also consider factors such as volatility or the price of the target property. Crypto-backed loans are typically overcollateralized, which provides some mitigation against volatility risks.

To formalize the loan, the borrower will need to surrender their collateral to an escrow account and sign a contractual agreement to the loan terms. The agreement will stipulate conditions such as the interest rates, repayment terms, loan period, and what happens if the value of the collateral falls below the value of the loan.

In this scenario, the borrower may be required to add collateral to their account to bring it back to a value that sufficiently secures the loan. Alternatively, the lender may include a provision that allows them to liquidate the assets or make a legal claim on the owner’s other assets or the home itself.

If the borrower pays back the loan according to the agreement, then their collateral will be returned to them at the end of the loan term. If the borrower defaults on the repayments, then according to the loan agreement, the lender will be able to claim part or all of the collateral to cover the value of the default, and assets may be liquidated.

Depending on the lender and protocols used, blockchain and smart contracts may be used to automate the execution of loan terms.

Types of crypto-backed mortgage loans

Crypto-backed mortgage loans can be used in various scenarios where real estate financing is required:

Home purchasing mortgages are used to fund a real estate purchase, with the loan guaranteed by the value of crypto assets.

Refinancing, also known as remortgaging, allows an existing homeowner to provide cryptocurrencies as collateral against a loan on a property they already own.

Bridging loans are used for interim financing when a homeowner needs to finalize the purchase of a new property for a period until the proceeds from the sale of an existing property are credited.

There are also different ways to access crypto-backed loans, depending on the lender and the products they offer. For example, some lenders may allow users to provide stablecoins as collateral, which will avoid the volatility associated with assets like BTC or ETH. It may also be possible to cross-collateralize using a variety of cryptocurrencies in a portfolio.

Lenders may use traditional lending models and infrastructure or operate as a DeFi application on a blockchain. In the latter case, the process is likely to be fully automated with little or no human involvement.

Tomorrow we'd examine the Benefits and Risks associated with Cryptocurrency backed mortgages.

Big thanks to @BitstampLearn