Crypto mortgages are now a thing; will they come to Canada?

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Although they offer a way to turn crypto wealth into real estate, they come with risks

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A Miami-based lender is offering crypto investors the chance to have their cake and eat it too.

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Fintech Milo announced in January that it was launching a new crypto mortgage that allows buyers to pledge their Bitcoin as collateral, allowing them to secure a home loan without needing a down payment or a strong credit score. .

With Bitcoin currently tanking – it’s lost over 20% of its value in the last month alone – the timing of such a launch isn’t exactly ideal.

But Milo says he has a long waiting list of Bitcoin investors hoping to build on their crypto success and diversify their portfolios with real estate.

“For us, it’s really ‘How do we think about subscribing to a consumer who has a different kind of wealth?'” says Josip Rupena, CEO and Founder of Milo.

Crypto and real estate seem to make an odd match. The first is built on volatility and opaque mechanics that most people don’t understand; the latter is known for its stability and transparency.

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How does Milo intend to make these two worlds coexist? Could such a marriage work in Canada?

Milo’s Crypto Mortgage

For crypto investors looking to diversify into real estate, Milo’s value proposition is quite an attractive alternative to cashing in their Bitcoin.

Homebuyers pledge their Bitcoin to the business and transfer it to a third-party custodian upon closing. When the mortgage is fully paid off, their Bitcoin is returned.

Not having to offload crypto assets means there is no proceeds to tax. Investors also won’t have to worry about missing Bitcoin price appreciation.

“That’s one thing we’re really trying to mitigate: an opportunity cost,” Rupena says, adding that $1 million worth of Bitcoin sold five years ago would be worth around $10 million today.

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The amount Milo lends depends on the amount of Bitcoin a borrower is willing to provide as collateral. At the start of a loan, the ratio of the pledged bitcoin to the mortgage amount must be at least one to one. A crypto mortgage of $250,000, for example, would require a pledge of at least $250,000 in Bitcoin.

After the first year of a loan is over, you can adjust the bitcoin to mortgage ratio. Pledging more Bitcoin may result in a lower interest rate; putting less than the mortgage amount raises the rate, which Rupena says is between 5% and 8% for a 30-year mortgage. Refinances and other amortization periods are not currently available.

Once the mortgage loan agreement is signed, borrowers make monthly cash payments as they would with a traditional mortgage. If a client pays off their mortgage in less than three years, they will be charged a prepayment charge. They can repay up to 20% of their loans during the initial three-year window without risk of penalty.

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Speaking of threats…

What about risk?

Bitcoin is arguably one of the most volatile assets that has ever made mainstream investors salivate.

The world’s most popular cryptocurrency has withstood four major crashes since 2017, including two since 2020. The coin’s current fall has seen it lose nearly 40% of its value since hitting a peak of over of US$84,107 in November.

Creating mortgages using collateral that doesn’t have a constant value — and avoiding traditional underwriting practices like prioritizing a borrower’s credit rating — seems extremely risky.

Rupena says Milo has a few measures in place to protect the company.

“When we give a loan, we will also have a lien on the property,” he says. “And then we will also have a pledge on the crypto, so in case of non-payment, we can use the crypto as a recourse.”

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According to Milo’s website, once a payment is 15 days overdue, the company will liquidate the equivalent US dollar value of the borrower’s Bitcoin pledge.

If Bitcoin sinks to the point where it is worth less than 65% of the mortgage amount, Milo will request a margin call, in which case borrowers can pledge more Bitcoin. If they cannot, the lender will liquidate the Bitcoin.

The company seems protected; consumers, not so much.

If Bitcoin takes a nose dive, it’s fair to wonder how many investors will be sufficiently diversified or have enough cash to withstand the fallout. Will they have the resources to respond to a margin call? If their Bitcoin is liquidated, will they be able to make up the difference and retain ownership of their home?

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Even with the cryptocurrency’s built-in volatility, Rupena is optimistic about its long-term role in buying real-world assets.

“I think crypto is here to stay,” he says. “People are choosing to invest and keep their wealth there rather than, or perhaps in combination with, investing in the stock market and other asset classes.”

A crypto mortgage for Canadians?

Don’t expect a product similar to Milo’s Crypto Mortgage to materialize in Canada anytime soon.

Canada is still very tied to fiat, or government-issued, currency. For any crypto investor to turn their coins into real estate here, they must sell them, pay taxes on the proceeds, and place the remaining funds in a Canadian bank account for 90 days before a lender considers them assets.

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Federally regulated banks are unlikely to see crypto as a viable alternative to currency as it currently exists, says a mortgage industry insider who asked to remain anonymous.

The insider says a seismic change should happen, like a G20 central bank issuing its own cryptocurrency, before Canadian lenders even start warming up to the idea of ​​using it to pay for real estate .

With Canadians having an estimated $2 trillion in mortgage debt, the idea of ​​homeowners losing both their crypto assets and their homes in the event of a double downturn might be too much carnage for federal regulators to bear.

But Milo’s willingness to address the concerns of a new breed of borrower deserves some respect, says Chris Turcotte, president of Centum Financial Group, one of Canada’s largest networks of mortgage brokers.

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“I think it’s important to show this new generation, who clearly have a fundamental belief in the cryptocurrency movement, that companies are thinking about ways to create that future that they understand, support and in which they invest. The ability to transfer those crypto gains into mechanisms where they can start acquiring real estate is super important,” Turcotte says.

But even crypto converts like Turcotte know that not all is up when Bitcoin and real estate come together.

“Somebody has to hedge that volatility risk,” Turcotte says.

How this happens and who takes responsibility for it – Canada’s lenders or its borrowers – will have to be decided before any crypto-real estate union receives the federal green light.

Crypto investors are comfortable with volatility. Canada’s frenzied real estate market, deemed “unsustainable” for nearly a decade, carries enough risk to deal with it as is.

This article provides information only and should not be construed as advice. It is provided without warranty of any kind.

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