Crypto Mortgages, Loans Are Gaining Ground
There has been talk for some time of people buying real estate with cryptocurrency, but a new report from banking giant Citi reveals that crypto mortgages are gaining traction for reasons that suggest loans backed by digital assets will have a growing place in the broader lending market.
Noting that it is “rare to find ‘new’ types of mortgages in the post-crisis US mortgage market,” Citi Global Perspectives & Solutions (GPS)’s “Home of the Future” report said that a “new crypto-adjacent mortgage product” has risen to prominence with a simple motivation: to allow crypto investors to use their investment gains to secure a loan without incurring capital gains tax by selling cryptocurrency to pay for goods, and without parting with digital assets that many large crypto holders hope to increase in value significantly over the long term.
How these mortgages work is quite similar to how decentralized finance (DeFi) lending/borrowing platforms work: put crypto as collateral for the loan – whether it’s stablecoins in DeFi or a mortgage on the housing market.
One of the benefits of the mortgage market is that people who live off crypto investments are essentially shut out of Fannie Mae and Freddie Mac, i.e., shut out of the traditional mortgage market.
One difference is that Citi has found that mortgages typically require “crypto deposits at least equal to the purchase price to be transferred to a custodial account,” while DeFi lenders typically want between 125% and 150% collateral at count.
Mortgages generally have margin calls to avoid liquidation – and potentially foreclosure – if the collateral value falls below a certain threshold, say 35% of the loan value, while DeFi loans generally have liquidated if the value approaches the total value of the loan.
The same principle is applied to personal loans secured by a number of centralized crypto lending companies, including SALT Lending (minimum $5,000) and Unchained Capital (minimum $10,000), which unlike some other crypto lenders aimed at consumers, offer cash loans rather than stablecoins. .
Ledger, maker of the secure Nano digital wallet – the leading “cold” hardware wallet – has teamed up with London-based fintech group Baanx to create a Visa debit card that will allow users to spend the crypto stored on their Nano wallets.
See more: PYMNTS Crypto Basics Series: What is a Crypto Wallet
But, the card – which puts potential users on a waiting list – will also offer loans based on that crypto balance. They will have a 30 day window to repay without interest. So while it’s not exactly a secure card, it can work the same way from the user’s perspective.
The problem with this type of secured loan can be seen in the fate of two other crypto lenders that offered direct individual loans: Celsius and BlockFi. Celsius is insolvent and BlockFi barely escaped it, and the two froze collateral withdrawals as they weathered financial crises as companies they lent hundreds of millions of dollars to defaulted this month.
See also: Crypto Companies Looking for Saviors Find Wolves in Sheep’s Clothing Instead
While BlockFi has been bailed out and can be acquired, Celsius is facing Chapter 11, and crypto depositors have no special status as creditors in a bankruptcy liquidation. Without FDIC insurance, significant losses are possible.
Big tax benefits
This type of loan has several advantages, starting with a modification of the same capital gains tax problem that crypto mortgages solve.
In short, bitcoin is considered a commodity, and all other cryptocurrencies are arguably – and this is hotly debated – either securities or commodities.
See it here: Gensler pushes crypto’s #2 status into regulatory limbo
But either way, whenever you sell cryptocurrency, you are liable for capital gains tax, even if you sell it through a crypto debit card to buy a cup of coffee. Along with the added tax burden, the paperwork required to simply determine the capital gain amount and file with the IRS makes it difficult to spend on small-scale crypto – at least in theory, because the problem hasn’t really come up. from a tax perspective. But it’s quite problematic that the Senate is considering crypto regulation that would exclude purchases up to $200.
Also Read: Senate Crypto Bill Debuts and Crypto Industry Scores Big Wins
However, once you get into spending by debit or credit card, it’s an easy limit to cross – a dinner for two with wine would exceed it in many cities.
With any loan, be it a personal loan, revolving line of credit, or secured card, that wouldn’t be a problem unless you paid the monthly balance with crypto. And even then, 12 annual capital gains reports are a lot easier than hundreds or thousands.