Using cryptocurrency transactions for mortgage finance
When we first wrote about the tax treatment of cryptocurrency in 2017, investment in and the use of cryptocurrencies to fund transactions, was just beginning to capture the public’s imagination. Now that the world has embraced the digital age, cryptocurrencies have emerged as a prominent alternative investment and financial asset in their own right. In this post we discuss using cryptocurrency transactions for mortgage finance and the potential issues that can arise.
In the UK, an increasing number of individuals are turning to proceeds of cryptocurrencies, such as Bitcoin, Ethereum, and other digital currencies. Some of our clients have in fact used these proceeds to support their mortgage applications to acquire residential properties.
We discussed potential issues with Ben Rogers, Managing Director of The Mortgage Squad, Ben is very forward thinking and works with a number of clients in the tech sector and is therefore ideally placed to address any potential issues.
Ben considers that whilst using cryptocurrency transactions for mortgage finance holds the potential for greater financial flexibility, it also presents unique challenges for both borrowers and lenders.
Ben has explored using cryptocurrency transactions for mortgage finance and the issues faced by people using cryptocurrency assets to support mortgage applications in the UK. He has focused on income derived from cryptocurrency investments to support affordability and using cryptocurrency proceeds as a source of deposit and his thoughts are set out below.
Income Derived from Cryptocurrency Investments
Volatility and Uncertainty
One of the primary concerns for lenders regarding cryptocurrency-based income is its inherent volatility. Cryptocurrencies are notorious for their price fluctuations, which could lead to significant variations in an applicant's income over a short period.
This poses a risk for lenders, as it may impact the borrower's ability to meet their mortgage obligations in the future. Traditional forms of income, such as salaries or rental income, are perceived as more stable and predictable, making them preferred by lenders.
Lack of Regulation and Documentation
Unlike traditional income sources, cryptocurrencies are relatively new and not as tightly regulated by financial authorities. This lack of regulatory oversight raises concerns for lenders when verifying the legitimacy of cryptocurrency income. Additionally, the documentation process for cryptocurrency-derived income may be complex, and some lenders may be hesitant to accept such unconventional proof of earnings.
What is the solution?
Unfortunately for the time being, lenders simply will not accept profits from cryptocurrency holdings to be considered as income for mortgage applications. This is largely owing to the volatility in the crypto markets – the fallout from FTX being a case in point. Past performance does not equate to future performance and whilst applicants may have previously had profitable years, this does not translate to future profitability. For this main reason, lenders are very reluctant to take the risk of relying upon income derived from cryptocurrencies to support the affordability of a mortgage application.
Hopefully down the line, potentially if and when the Crypto industry is more thoroughly regulated, this could change. If ever lenders were to consider income derived from Cryptocurrency trading as an income for mortgage application purposes, it would very likely need to be evidenced via a minimum of 2 years tax returns showing the profits have been declared for tax purposes. Lenders would then typically average the last 2 years profit figures and use this average income figure for the purposes of a mortgage application.
Using Cryptocurrency Proceeds as a Source of Deposit
Source of Funds Verification
When utilizing cryptocurrency proceeds as a deposit for a mortgage, the issue of verifying the source of funds arises. Lenders are obligated to prevent money laundering and ensure that the funds being used for the deposit are legitimate and obtained through legal means.
Proving the origin of cryptocurrency assets can be challenging, as transactions in the blockchain are often anonymous and difficult to trace or in the case of a trader, there can be numerous transactions between the point of the funds being converted from fiat currency to cryptocurrency then back out the other end into fiat currency again.
Valuation of Cryptocurrency Assets
Another challenge is valuing cryptocurrency assets accurately. Cryptocurrencies experience significant price fluctuations, and the value of an asset can change drastically between the time of the application and its approval. This creates uncertainty for both borrowers and lenders and may impact the final approved loan amount.
What is the solution?
To overcome the hurdles associated with using cryptocurrency proceeds as a deposit, applicants should consider the following strategies:
Conclusion
While cryptocurrency assets hold the promise of financial innovation and inclusivity, using them to support mortgage applications in the UK comes with its share of challenges. From the volatility of income derived from cryptocurrencies to verifying the source and value of cryptocurrency proceeds used as a deposit, both borrowers and lenders must navigate uncharted waters.
By adopting transparent practices, seeking expert advice, and embracing innovative solutions, applicants can enhance their chances of successfully incorporating cryptocurrency assets into their mortgage applications, paving the way for a more crypto-friendly financial landscape in the UK.
If anyone wishes to discuss this further with The Mortgage Squad, they can be contacted by phone on 0330 0433204 or by email on [email protected].
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