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Crypto Mortgage: The Ultimate Guide

Planning to buy a house using the profits gained from crypto sales? Here is a complete guide detailing the benefits, legality, mortgage application process, and more.
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Cryptocurrencies are popular investment options among the younger generation despite the volatility and complexity involved in buying or selling them.

This is because the constant fluctuations in market value can give investors a chance to make quick profits within a short period. 

No wonder individuals are trying to climb the property ladder by applying for mortgages with crypto gains as deposits. 

However, of course, there are legal and legitimate concerns about using crypto for mortgage deposits

Some traditional financial institutions and lenders might also consider Bitcoin, Ethereum, and other cryptocurrencies risky because of their reputation for being used for tax avoidance and other potential anonymity concerns.

Nonetheless, you may be able to apply for a Crypto Mortgage and purchase a house in which crypto has been used as the deposit.

Read on to learn more about securing a mortgage with cryptocurrencies like Bitcoin as the deposit source.

What Is A Crypto Mortgage?

When we talk about a crypto mortgage, we usually refer to a mortgage where property buyers use the proceeds gained from selling or trading crypto holdings as a mortgage deposit.

These profits are taxable. 

However, there’s another alternative collateral-based crypto mortgage model that was introduced by Milo in the US in 2022. 

Crypto-backed mortgages enable you to use the crypto equivalent of the property value as collateral to make a purchase.

In other words, you need not sell your crypto assets and miss out on future profits. All you have to do is make your monthly mortgage payments consistently for the duration of the mortgage.

Your crypto holdings will remain intact, and you won’t have to pay taxes. And you can get back your assets once the mortgage is paid off. 

You might not even have to involve a family member to sign off as a guarantor, as the collateral will serve as security.

The only downside of this crypto mortgage is you might have to add more crypto as collateral if its price drops significantly.

This is just for information – of course nothing like this is available in the UK as of yet. 

Types Of Crypto-Backed Mortgages

The three most common types of crypto-backed mortgages are as follows:

1. Cash-Out Financing

These are financing options available to homeowners with existing mortgages. They may refinance their mortgages using crypto as collateral to acquire funds.

2. Purchase Mortgage

This is a real-estate financing option where borrowers use cryptocurrency as security to finance the purchase of a new house.

3. Bridge Loans

The crypto collateral is used to acquire a bridge loan for a shorter time. This duration covers the gap between selling an existing house and buying a new one.

How To Apply For A Crypto-Backed Mortgage?

The first step of the process is transferring your crypto holdings to the mortgage lender as collateral. After this, the lender will consider the value of your security deposit to determine the total loan amount.

Of course, the origin of the holdings is assessed to ensure the lender meets the Anti-Money Laundering regulations and other compliance checks associated with crypto. The mortgage terms, including the duration and interest rates, are decided based on that.

In most cases, the holdings are transferred to an escrow account. And a third party manages the assets, funds, documents, or property for both the lender and borrower till the mortgage criteria are met.

The cryptocurrency collateral is then kept locked for the entire mortgage term. However, borrowers will have to keep a buffer between the mortgage amount and collateral value to minimise the volatility risks.

“Buffer” is basically the percentage difference between the loan amount and collateral value. It acts as a safety cushion for the lender and borrower, which prevents the fluctuations of the cryptocurrency from liquidating the locked-up collateral.

You will have to continue paying off the mortgage monthly using fiat currency. And you will get back your crypto assets once the entire mortgage is paid off.

Is It Legal To Pay A Mortgage With Crypto?

As of today, crypto is not directly accepted as a payment method by the majority of mortgage lenders when it comes to putting down mortgage deposits or paying monthly payments.

But you can cover your mortgage payments by converting Bitcoin and Ethereum into Sterling or fiat currency.

Even then, the payment is considered legal only after you declare the income to the HM Revenue & Customs (HMRC). Note that you must pay Capital Gains Tax on the proceeds if they exceed 6,000 pounds.

Borrowers can also pay off their mortgage entirely using crypto gains or put down a large deposit. 

However, since this would be a large sum, the lender will have to scrutinise and verify the funding source to prevent the possibility of fraud and money laundering.

The process can be simplified by providing additional paperwork that documents your cryptocurrency trail. This includes the origin of the funds used to buy crypto and the source of trade or exchange. 

If the lender suspects tax avoidance or any other suspicious activity, they might report you to the HMRC.

Benefits Of Securing A Mortgage With Crypto

Does Investing In Crypto Affect Mortgage

While it’s a bit unconventional and challenging to secure a crypto mortgage, there are some interesting benefits that make it worthwhile.

1. Faster Transactions And Accessibility

Cryptocurrencies are a decentralised form of currency, meaning there are no banking or geographical restrictions. You can transfer funds obtained from crypto sales to the mortgage lender from any location.

Moreover, the time taken to process transactions is less compared to traditional banking systems.

2. Lower Fees

The crypto mortgage process is digital and facilitated by smart contracts. This reduces the need for intermediaries and middlemen. As such, lenders may offer mortgages at discounted interest rates and lower fees.

3. Higher Liquidity Access With Crypto As Collateral

Borrowers can leverage their crypto assets as collateral to secure a mortgage. This enables them to purchase a home without having to sell the crypto holdings, retaining their value in the long run. 

If the price of the cryptocurrency increases, they may even take out some of the collateral-bound crypto to sell and earn profits. 

The collateral may also enable you to take out a mortgage without a strong credit score.

Does Crypto Mortgages Involve Affordability Assessments?

The straightforward answer to the question is yes. 

Irrespective of the type of mortgage you apply for, every lender conducts an affordability assessment to ensure your credibility as a borrower.

They check the following to verify whether or not you can pay the mortgage back within the stipulated time:

  • Your employment status: self-employed or salaried
  • Credit history and score: a good credit score reflects the borrower’s credibility 
  • Expenses: includes debts, loans and credit card dues, water and gas bills, childcare expenses, etc.
  • Additional income source: any income received from freelance jobs, investment dividends, pension, etc.

Unfortunately, lenders do not account for the profits from crypto sales as income when conducting affordability assessments. This is because of the risks and uncertainty associated with cryptocurrency.

The market is highly volatile, so lenders won’t be able to gauge the borrower’s ability to repay the mortgage. If the cryptocurrency price falls in the future, they may struggle to make the payments. 

That said, the crypto market may get more stable in the future as crypto becomes more popular. So, lenders may include the decentralised form of currency in their affordability assessments then. But there’s still a lot of time for that.

For now, you should connect with a broker experienced with cryptocurrency mortgages to find specialised lenders more willing to consider crypto mortgage applications.

Downsides To Applying For Crypto-Friendly Mortgages

Let’s talk a bit more about the downsides to cryptocurrency so that you know what you are getting into when applying for a crypto-friendly mortgage.

1. Limited Crypto-Friendly Mortgage Lenders

As of now, the UK has only a limited number of lenders who consider mortgage applications of individuals using crypto profits as income for deposits.

Some of the crypt-friendly mortgage lenders are Norton Home Loans, Nationwide, and Loughborough Building Society. 

The limited options make it difficult for borrowers to find a mortgage deal that meets their requirements regarding loan-to-value ratio, repayments, and interest rates.

2. Volatility & Unpredictability

The crypto markets are volatile, meaning the prices of your crypto holdings might increase or decrease within short durations. 

This decrease in price will depreciate the value of the crypto used as collateral, leading to substantial financial losses and foreclosures.

Of course, mortgage lenders also consider this a risk when determining whether or not the borrower can repay the mortgage.

3. Security Concerns 

Cryptocurrency markets are unregulated, meaning there is a risk of theft, hacking, and cybersecurity breaches. 

So, if your crypto holdings get compromised, you are bound to face financial instability and losses.

4. Anonymity May Lead To Fraudulent Activities

It’s difficult to trace crypto fund transfers owing to the anonymous nature of the decentralised currency. 

As such, the cryptocurrency market is common ground for money launderers, hackers, and tax avoiders. 

Mortgage lenders are, hence, very strict regarding checking documents and paperwork related to crypto holdings. 

You will have to provide detailed documentation of all your crypto transactions, from buying cryptocurrencies to selling or trading them.

Crypto-Friendly Banks And Lenders

Crypto-Friendly Mortgage Lenders

Crypto-backed mortgages are yet to be launched in the UK. But banks, including Pepper Money, Bluestone Mortgages, Barclays, and NatWest, already accept crypto profits as mortgage deposits.

And with the rising popularity of cryptocurrency and the market maturing, you can expect more names to enter this list. 

Paying Off Your Mortgage With Cryptocurrency

Start by trading your crypto holdings for profits, declaring them as income, and making the required tax payments so you can legally pay off your mortgage using them. Next, check your accounts by an accountant to avoid errors that may become a hurdle in your mortgage application approval.

You can use these gains to put down a deposit for your house or simply use them to cover the monthly mortgage repayments. Just make sure your crypto holdings and funds satisfy the AML regulations and other compliances.

To ensure this, gather all the bank statements, paperwork, and documents to how you bought and sold your crypto assets. The papers should also show how long you held the cryptocurrency and where you held it (if in a digital wallet).

Frequently Asked Questions (FAQs)

1. Can You Use Crypto For Direct Property Transactions?

Currency, crypto or crypto profits can’t be used for direct property transactions in the UK. But the good news is that Coadjute, a UK firm, announced in 2021 that it’s in the process of developing a stablecoin linked to the British pound. It may be used for the direct transfer of funds for the purchase of houses. 

2. Are Crypto-Backed Mortgages Prevalent In The UK?

Crypto-backed mortgages are not yet mainstream in the UK. But with the evolution of the crypto market, it won’t be long before they enter the British housing market. Just be prepared for strict eligibility criteria and larger deposits.

3. Is Cryptocurrency Considered Money Or Property?

Digital assets, including cryptocurrencies, are considered property for tax purposes. This means you have to pay capital gains tax on the profits received after selling your crypto to make mortgage payments. 

You should declare this income and present paperwork that suggests all your tax payments are up to date. 

If the lender suspects you haven’t paid the correct tax amount, they might file a Suspicious Activity Report against you with the HMRC.

How Mortgage Brokers Can Help You Secure A Crypto Mortgage?

Buying your first home is a dream for many. And now, that is possible with the evolution of the cryptocurrency market and its gradual yet seamless integration into the real estate industry.

If you are looking to buy a house by putting down a deposit after selling your cryptocurrency for legal tenders, start by seeking advice from a mortgage broker or advisor. 

They will be able to connect you with crypto-friendly mortgage lenders who are more likely to approve of your application.

You’ll also get the best mortgage deals provided you have sufficient evidence to surpass any anti-money laundering and tax avoidance checks.

That said, crypto mortgages are a significant financial commitment, so make sure you have considered your long-term goals and the risk factors involved.

Our goal is simple - to provide most up-to-date and accurate mortgage information to make your mortgage journey as stress-free as possible. Have a question? Fill up the quick form and one of our mortgage advisor will connect with you.

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