Cryptocurrency and Mortgages

Cryptocurrencies such as Bitcoin and the Ethereum platform are increasingly popular investor options, despite their notorious volatility and the relative technical complexity of using them. It’s easy to understand why there’s a growing interest in crypto, especially among younger investors; the volatility is an opportunity to make significant gains in a short period of time. Also, unlike bank transactions, crypto transfers are close to instantaneous and can cross borders without the hassle of exchange rates and bank fees.

There are also legitimate concerns from traditional financial institutions and industry regulators about the use of crypto for money laundering and criminal enterprise, as well as tax avoidance purposes. While there’s a widespread recognition that digital currencies based on blockchain technology are here to stay, it's early days for crypto and mortgages.

What Is Cryptocurrency?

Cryptocurrency is a form of money based on blockchain technology. Blockchains are decentralised ledgers that store transaction records – known as blocks. Each block is time-stamped and includes information about the previous block, so the blocks form a chain. As blockchain data is stored across a network of servers and uses cryptography, it's impossible to modify or hack the information.

The most well-known crypto is Bitcoin, which first appeared in 2009. As of April 2022, the market cap of Bitcoin was $829 billion. Although Bitcoins are “mined” using powerful computers that solve complex mathematical problems, there’s a finite supply. Only 21 million Bitcoins can ever be produced. Bitcoins are so popular that it's common to refer to cryptocurrencies as Bitcoin, even though there are many other types of crypto coins.

The volatility of crypto cannot be overstated. For instance, Bitcoin lost 30% of its value in the weeks after an all-time high of $69,000 in November 2021. However, it still rose 60% across the year, far exceeding returns from traditional assets such as commodities, stocks, and gold.

The second most popular crypto is the Ethereum platform and a coin called Ether. Unlike Bitcoin, there is an unlimited number of ether coins available, although there is a production limit of 18 million ether per year.

Another notable coin is Tether which is pegged to the US dollar at $1 per coin. Tether is often used when traders move from one cryptocurrency to another. As with other cryptocurrencies that are anchored to an old-world currency – such as USD Coin – it’s also known as a stablecoin.

There are thousands of other types of crypto out there, most of which have low trading volumes and are only of interest to professional traders.

Can You Pay Your Mortgage Deposit with Crypto?

It’s not impossible to pay for your deposit directly with a cryptocurrency such as Bitcoin, but there are very few lenders that will consider it. However, if you sell your crypto and convert it to pounds sterling, you’ll find more lenders willing to accept this as a source of funds.

That said, because of the risk of money laundering associated with cryptocurrencies, lenders who do accept crypto-sourced deposits will need to see how you acquired your crypto coins, such as a bank statement. They'll also want to see how you sold them, evidenced - for example - in records from a crypto exchange. You’ll also have to show that you have paid tax on any profits. HMRC currently considers cryptocurrencies to be property rather than money, for which you'll have to pay Capital Gains Tax on profits.

As cryptocurrency is so new, you may find the mortgage brokers and lenders you contact uncertain about their status and applicability. Most lenders have yet to develop criteria for accepting or rejecting mortgage applications that use cryptocurrency as a deposit source and therefore decide on a case-by-case basis. This is likely to change, but it will take time for the rules around crypto and mortgages to evolve.

Which Lenders Accept Crypto Deposits?

Globally, financial institutions are taking their first steps toward accepting crypto to pay mortgages. In the US, United Wholesale Mortgage announced in January 2021 that it would be the first lender in America to accept crypto to pay for mortgages by the end of the year. However, the lender cancelled the initiative later in the year due to a combination of incremental costs and regulatory uncertainty.

An alternative collateral-based model was also launched in the US by Milo for customers with significant crypto assets in February 2022. In this model, the borrower puts up the crypto equivalent of the value of the property and is granted a 30-year mortgage. This approach builds in the volatility of digital currency. If the price of Bitcoin rises, borrowers could take out some of their locked-up crypto. If the price drops, they would be required to add crypto as collateral. Mortgage holders could get their crypto back once the mortgage is paid in full.

In the UK, banks such as Barclays, Tandem Bank, Bluestone Mortgages and Pepper Money accept mortgage deposits from the sale of crypto. Crypto sales are increasingly used to fund part of the mortgage deposit, in the same way that borrowers may sell stocks and other investments to generate their deposit.

As with the United Wholesale experience, it may be that for years to come, borrowers prefer to raise mortgage deposits out of crypto sales among other sources of income, but there isn’t a widespread demand for mortgages and mortgage deposits to be paid for in crypto. While Bitcoin and Ether are seen as an increasingly popular investment vehicles, there is little evidence that crypto will ever replace money in the purchase of goods and services - including buying homes.

Can Income from Crypto Be Used When Assessing Affordability in a Mortgage Application?

Currently, crypto is not accepted as a source of yearly income to assess affordability on mortgage applications. The market volatility of crypto like Bitcoin and Ether and issues around traceability make it difficult for mortgage lenders to assess the level of risk. The concern from lenders is that if the value of your cryptocurrency drops, you may not be able to meet your monthly repayments. Many personal finance experts recommend that due to the volatility of crypto, it should not comprise more than 5% of your overall portfolio.

Nonetheless, the situation is evolving and lenders may take a more unified stance in the future, especially if the current volatility of crypto decreases as the market matures. However, even if crypto-based income becomes acceptable, lenders are still likely to require a larger deposit and impose strict eligibility rules to offset the increased risk.

Can You Pay Your Mortgage Using Crypto?

As with mortgage deposits, you cannot meet your monthly interest and mortgage repayments using Bitcoin or other forms of crypto. However, you could use your crypto profits, converted into sterling, to cover your mortgage. You’d have to declare this income to HMRC, noting that the Capital Gains Tax allowance is up to £6,000 per year (2023/24).

You could also potentially pay off your mortgage using crypto profits. However, as this may be a large sum, mortgage lenders would need to verify the source of funds to allay fears of money laundering. You would likely have to complete a self-assessment tax return that details your crypto earnings and provides a clear trail of your crypto trading. You’ll also have to show you have paid the requisite Capital Gains Tax on the lump sum sale of your crypto. If you’re considering going this route, we recommend seeking tax advice in advance, as crypto-related tax matters can be complicated.

For cryptocurrencies like Bitcoin and Ether to be accepted for mortgage deposits and to cover monthly interest and mortgage repayments, mortgage lenders would require crypto exchanges to adopt "know your customer" rules, with withdrawals over £10,000 reported to the HMRC.

Can Crypto Be Used for Property Transactions Where You?

Crypto isn’t really used for property transactions – whether that’s buying outright with bitcoin or converting it to cash to then buy – but the situation is evolving. In 2021, UK firm Coadjute announced it is developing a stablecoin linked to the pound that will be used solely for the transfer of funds related to house purchases.

As soon as the buyer and seller are ready to complete the transaction, the funds are locked into their bank accounts. Coadjute then issues stablecoins that represent the transaction to its blockchain ledger. Ahead of the completion date, the stablecoins are allocated to the respective parties. On completion, the stablecoins are released and converted back into sterling.

This ingenious solution avoids delays related to bank transfers and working hours and minimises paperwork. It also removes the risk of fraud or human error in inputting account numbers, as only pre-approved bank accounts and verified parties can be used during the transaction. Blockchain-based technology such as the Coadjute stablecoin has the potential to revolutionise the mortgage and finance industry.