If you haven’t heard the news, a company called Milo is now offering the world’s first crypto-backed mortgage loan.
It’s a 30-year product that lets you leverage your cryptocurrency holdings (just Bitcoin at this time) to purchase a home. You then repay the loan monthly, plus interest, in USD, Bitcoin, or stablecoin.
During the course of the loan, Milo holds your crypto in a secure location, and once the balance is repaid in full, it’s released and returned to you.
For crypto investors, it can certainly be a tempting premise — especially when you learn that there’s no down payment, tax returns, or credit check required either. But should you dive in and get on the company’s reportedly long “waitlist”? Here’s what to consider first.
What if your crypto value drops?
The biggest risk with these mortgages lies in how much crypto value can fluctuate. Right now, the company only takes Bitcoin, which has had its fair share of dips over the last few years. In fact, Bitcoin’s value has dropped more than 20% in just the last six months.
When the value of your crypto collateral falls, it can trigger a few things: First, it can impact your loan’s interest rate. The more the value drops, the higher your loan-to-value ratio goes, and the more your rate will rise. Milo’s loans are adjusted annually based on the crypto’s value.
It could also trigger a margin call if your Bitcoin value drops under 65% of your loan amount (meaning you’ll need to contribute more coin), and if it goes below 30%, the company will liquidate your holdings and store the USD balance instead. Obviously, if you’re counting on that crypto as a long-term investment, the latter is something you’ll want to avoid.
Remember the housing crash?
Loose mortgage lending practices were a big contributor to the 2007-2008 housing crisis. Lenders doled out mortgages to underqualified homebuyers, and when home prices dropped, many went upside down on their loans, owing more than they were worth.
While I’m not saying these crypto-backed loans will do the same thing, removing the credit check and down payment components is definitely a risky callback to the early aughts, and buyers could find themselves in a similar position should home prices drop.
If these loans pick up steam (so far, only one lender is offering them, but a few others appear to have products in the works), it could mean bigger issues for lending as a whole. But that’s a story for another day.
Should you leverage your crypto?
Crypto-backed mortgages aren’t all bad, and there are some obvious advantages for the right borrower. You don’t need great credit or tax returns to qualify, there’s no down payment, and the process is faster than traditional lending as well.
If you’re not eligible for a conventional or FHA mortgage (at least an affordable one), they could be a good option — as long as you’re aware of the risks and are confident in your crypto’s future value. If you can get a traditional mortgage, though? You’re probably better off doing just that.