Crypto Mortgages Are Now a Thing; Will They Come to Canada?

Milo’s crypto mortgage

For crypto investors looking to diversify into real estate, Milo’s value proposition is a fairly attractive alternative to cashing out their Bitcoin.

Homebuyers pledge their Bitcoin to the company and transfer it to a third-party custodian at the time of closing. When the mortgage is repaid in full, their Bitcoin is returned.

Not having to offload crypto assets means there are no proceeds to be taxed. Investors won’t have to worry about missing out on any Bitcoin price appreciation, either.

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

The amount Milo lends depends on how much Bitcoin a borrower is prepared to put up as collateral. At the outset of a loan, the ratio between pledged Bitcoin and mortgage amount has to be at least one to one. A $250,000 crypto mortgage, for example, would require a pledge of at least $250,000 in Bitcoin.

After a loan’s first year is completed, you can adjust the ratio of Bitcoin to mortgage. Pledging more Bitcoin can result in a lower interest rate; putting in less than the mortgage amount increases the rate, which Rupena says ranges between 5% and 8% for a 30-year mortgage. Refinances and other amortization lengths aren’t currently available.

Once a mortgage contract has been signed, borrowers make monthly payments in cash just as they would with a traditional mortgage. If a customer pays off their mortgage in less than three years, they’ll be charged prepayment fees. They can pay off up to 20% of their loans during the initial three-year window without the threat of penalty.

Speaking of threats…

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What about the risk?

Bitcoin is arguably one of the most volatile assets ever to get mainstream investors salivating.

The world’s most popular cryptocurrency has weathered four major crashes since 2017, two of which have taken place since 2020. The coin’s current slide has seen it lose almost 40% of its value since hitting a peak of more than US$84,107 in November.

Originating mortgages using collateral that doesn’t possess consistent value — and eschewing traditional underwriting practices, like prioritizing a borrower’s credit rating — seems breathtakingly risky.

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

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

According to Milo’s website, once a payment is 15 days delinquent, the company will liquidate the equivalent value in U.S. dollars from the borrower’s Bitcoin pledge.

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

The company appears to be protected; consumers, not so much.

If Bitcoin nosedives, it’s fair to wonder how many investors will be diversified enough, or have enough of a cash cushion, to withstand the fallout. Will they have the resources to answer a margin call? If their Bitcoin is liquidated, will they be able to make up the difference and maintain ownership of their homes?

Even with the baked-in volatility of cryptocurrency, Rupena is bullish on its long-term role in purchasing real-world assets.

“I think crypto is here to stay,” he says. “People are choosing to invest and hold their wealth there as opposed to, or maybe 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 materializing in Canada anytime soon.

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

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

The insider says a seismic shift would have to occur, like a central bank in the G20 issuing its own cryptocurrency, before Canadian lenders even begin warming to the idea of using it to pay for real estate.

With Canadians carrying about $2 trillion in mortgage debt, the thought of homeowners losing both their crypto assets and homes in the event of a dual downturn may be too much carnage for federal regulators to bear.

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

“I think it's important to show this new generation, that clearly has a fundamental belief in the crypto currency movement, that companies are thinking of ways to create this future that they understand, support and are investing in. 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 it’s not all upside when Bitcoin and real estate come together.

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

How that occurs, and who bears the responsibility — Canada’s lenders or its borrowers — will have to be decided before any crypto-real estate union receives federal go-ahead.

Crypto investors are comfortable with volatility. Canada’s blistering housing market, deemed “unsustainable” for almost a decade, has enough risk to deal with as it is.