At some stage in your life, you will need to choose between renting a property or buying one to live in, unless you have it covered by your employment contract or are lucky enough to be gifted one! As with everything else, the choice between renting vs buying requires an assessment of pros and cons. In this article, I’ll be looking at the pros and cons of renting and outright purchases, as well as talking about Ledn, a crypto lending platform that has come up with an innovative solution of using your Bitcoin to get a loan for purchasing a home.
Renting a property
If we had to look at renting, the first benefit that comes to mind is flexibility. You get to pay a contracted amount of money per month in turn for accommodation for as long as you please, after which following a pre-agreed notice period you can easily exit and move on to another place. As such it comes with a relatively low level of financial commitment which is mostly limited to a prepaid deposit equivalent to a few months’ rentals plus the monthly rental payment thereafter. This works well for someone who does not intend to settle down in one place for too long, such as digital nomads or ex-pats on a definite contract. Another benefit of rental is that maintenance works and related costs, which can be quite a headache, are typically borne by the landlord.
On the flip side, an inevitable downside of rental is the need to adjust your style of living to any limitations imposed by the property’s finishing, layout, neighbours and location. Furthermore, from a financial perspective renting a place carries an opportunity cost in terms of foregone financial return otherwise arising from property ownership (as opposed to rental) in the form of value appreciation and if let out, in receivable rent.
Indeed the main distinction between renting and taking a home loan to get your own property is that in the former scenario you will simply be getting a place to live in while in the latter, on top of that you will be benefiting from the related financial return. And this added layer of return requires a higher level of investment, be it in money or time.
Purchasing a property
A property can be purchased for 2 reasons; habitation or renting out. If your purpose of obtaining a home loan is a habitation, you may opt to build a house from scratch and design it according to your personal preference. Alternatively, you may prefer something finished in order to move in there and then. While a finished house will be more expensive, it will save you from the effort, time and money typically required to finish it. On the other hand, when buying a property for rental, you will more likely compromise on personal taste in order to mitigate costs, thus increasing the return on investment.
Either way, investing in property through a home loan often translates into a profitable investment. Put that in the context of high inflation and it becomes even more attractive when the steeper the inflation rate the wider the spread over home loan interest rates. This is currently the case the world over (with no signs of stopping).
Before I dive deeper, I would like to identify the difference between home loans and mortgages given that this is a relevant distinction in the context of this article. In a home loan a borrower receives funds to purchase, build or renovate a property, which property is then kept as collateral against the loan. In the case of a mortgage, a borrower receives funds against a property being provided as collateral, with those funds being made available to the borrower to finance any financial obligation of his choice. Here the value of funding is determined by the market value of the property placed as collateral.
With that said, for the purposes of this article, I will be referring to the home loan described above as a mortgage.
Obtaining a home loan or mortgage
If you are in full-time employment and looking to get a mortgage, the bank will typically ask you to present your last 3 monthly payslips. If on the other hand you are self-employed and earning income through your business, the bank will typically only consider your application if you’ve filed your tax returns for at least 2 years. This is because banks rely on income forecasts (not assets) in ensuring the adequacy of liquid cash flows in view of maintaining the required debt/income ratio.
This poses a problem in that the banking system does not cater to those people who, notwithstanding their sufficient savings to afford a home loan, for varying reasons cannot provide the cited documentation. Perhaps you could have decided to quit full-time employment to unlock more free time or otherwise resigned from your job to set up a business related to your life’s passion. Regardless of your savings, it will be virtually impossible for you to get a mortgage from a bank.
Equally irrelevant to the banking system in providing mortgages are crypto holdings.
Indeed there is a growing number of crypto investors who have accumulated Bitcoin wealth worth millions and yet are unable to qualify for a mortgage in the absence of the required bank documentation. While for a number of years this issue has been very frustrating for these investors, there now seems to be a light at the end of the tunnel.
Enter Bitcoin mortgages
A number of crypto-friendly platforms are capitalizing on this deficiency from the part of traditional banks and have been introducing Bitcoin-backed mortgages which are innovative ways to service this niche. Given Bitcoin is the least volatile of cryptos, it lends itself more suitably as a means of collateral.
Ledn is the first platform to come up with this service. Founded in 2018 through a one-seed round of $3.9m, Ledn is a crypto platform licensed in Canada offering crypto HODlers (Bitcoin holders who do not intend to sell) a number of ways to leverage their Bitcoin (see more here). In other words, Ledn seeks to provide access to key financial products for those who choose to invest outside the mainstream of legacy banks.
One of these innovative products is Ledn Bitcoin mortgages.
What are Ledn Bitcoin mortgages and how do they work?
If you are looking to finance a purchase of property or to finish one you already own, Ledn will provide you with a mortgage equivalent to the value of your Bitcoin holding. Both your Bitcoin and the property will be kept as collateral and a loan is issued equal to 50% of the combined value of both assets. This effectively represents a Loan-to-Value of 50%. No down payment is needed when applying for the mortgage given the presence of joint collateral.
Anybody wishing to take out a Bitcoin mortgage needs to own Bitcoin equivalent to the property they are purchasing (or already own). So say you hold $600k worth of Bitcoin (at the current conversion rate) and you would like to purchase a house worth $600k. Ledn will provide you with a mortgage equivalent to your BTC, that is $600k which you will then invest in your property. Ledn will keep both your BTC and property as joint collateral while you gradually pay off the mortgage.
The Bitcoin mortgage is currently offered with a 2-year term. At the end of the 2 years, the status of the loan can be reassessed and renewed for another term.
Interest is payable on a monthly basis. The interest rate applicable on the loan will be determined subject to market conditions at the time of application, however, it will not be in excess of the 11.5% APY applicable on other Ledn products which I have separately reviewed, namely Bitcoin-backed loans and Ledn B2X loans. This is because the inclusion of real estate as collateral allows for a lower cost of financing.
Bitcoin mortgages will be available to Canada-based customers in Q1 2022 and then extended to US customers starting Q2 2022.
Apply for a Bitcoin mortgage today by signing up to Ledn’s waitlist below:
The Ledn mortgages couldn’t come soon enough. While this opportunity will initially be restricted to Canada and the US, I am looking forward to this and other similar products being rolled out in the rest of the world.
The Bitcoin mortgage lets you access liquidity without needing to sell your assets, thus also avoiding taxable transactions. You no longer need to decide between holding your Bitcoin or owning real estate. And if you already own a home that is not currently financed, the equity in your home can be used as collateral to buy more Bitcoin.