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The death of the bitcoin mortgage – Gill

by: Rob Gill, partner at Mercury FX
  • 20/08/2018
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The death of the bitcoin mortgage – Gill
As someone with a keen interest in bitcoin and mortgages, and with bitcoin becoming more prominent in general, I’m often asked when we might see the first bitcoin mortgage.

 

Despite the odd tweet, tongue firmly in cheek, that I might launch such a proposition, the short answer is not any time soon, mainly because they’re impossible.

Before the EU’s Mortgage Credit Directive, most people’s understanding of a foreign currency mortgage was a loan in a currency other than pounds sterling.

These were fairly popular pre-2007, attractive due to the lower interests available on euros, Swiss francs and Japanese yen.

Furthermore, if the currency you’d borrowed in weakened against the pound, you could buy back those euros, francs or yen for fewer pounds than you’d borrowed in the first place.

For example, if you took out a £500,000 loan and converted into euros at a rate of 1.25 you’d have a euro loan of €625,000.

If the £ then strengthened to 1.40 you could buy back the euros for £446,429, therefore locking in a reduction of £53,000 in your mortgage.

 

Volatility problem

The problem of course comes if the pound gets weaker.

If, in the above example the pound weakened to 1.1, the €625,000 would be worth £568,181. Furthermore, the security, i.e. the property, is still valued in pounds.

Let’s say the original purchase price was £800,000 for a loan to value (LTV) of 63%. Following the drop in the pound, the LTV is now 71%.

At this point the lender, almost certainly a private bank, will want to ensure the LTV does not rise any further and automatically switch the loan back into pounds, locking in the increase in the loan.

This process is known as a stop loss, and as the name suggests it’s designed to stop the loss for the client, and risk to the lender, getting any worse.

This example uses a fluctuation in the pound-euro exchange rate of roughly 12% in each direction, while the rates quoted have all been seen within the last three years.

 

Bitcoin rollercoaster

Bitcoin however is significantly more volatile.

In the last year alone, there have been 30 weekly moves of 10% or more.

As such it would be virtually impossible for a bitcoin mortgage to run for more than a few weeks before the lender switched it back into pounds.

The word mortgage derives from the French for ‘death pledge’.

If a defining characteristic of a mortgage is that it’s a long-term debt, a bitcoin mortgage is literally impossible.

Let’s pretend that you could take out a bitcoin mortgage, with a reckless lender who didn’t apply any stop loss, and you did so three years ago.

Your mortgage of £500,000 would have converted to 2,762 bitcoins at the price in early August 2015 of £181.

At the current Bitcoin price of £5,727, your mortgage would now be worth £15,900,834. It would’ve peaked at £40,285,786 last December.

In short, I won’t be launching a bitcoin mortgage anytime soon.

 

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