Getting that mortgage is a hassle. If you go through traditional lending institutions with their “institutional” regulations and requirements, there is an arduous process of providing income and debt documents, credit history, etc., and then coming up with that required down payment that the traditional institution requires before approving a mortgage loan.
For millennials, this presents a major barrier to homeownership. While 70% of Chinese millennials have already managed to purchase their first real estate, only 35% of their Malaysian peers have followed suit according to HSBC data. For 64% of millennials around the world a combination of low income and soaring property prices make the prospects of owning a house rather gloomy. A lot of them also do not qualify for traditional loans and do not have the family support for making that downpayment.
New technologies, however, have opened the doors for alternatives to lending, specifically, crowdfunding, a phenomenon that bypasses the “red tape” of traditional borrowing.
Merging Crowdfunding and Blockchain
Crowdfunding is also known as P2P (peer-to-peer) lending. A borrower accesses crowdfunding sites, identifies his need, and provides the details of their plan to repay lenders who are willing to put up money. Now, some crowdfunding is for charitable purposes (medical expenses, for example) and contributors do not expect repayment.
But it has also moved into a lending arena in which borrowers and lenders enter into agreements for repayment. Such would be the case for a mortgage down payment.
Add to this new concept the technology of blockchain, and you have a method by which borrowers can access an alternative down payment funding source, and an immutable record of each borrower-lender agreement is permanently recorded. This serves four purposes:
- Blockchain eliminates the traditional borrowing method, with its middlemen and fees. The repayment details are worked out between the borrower and the individual lender.
- Blockchain democratises borrowing, because credit scores, history, etc., are not factors in obtaining the loans. If a borrower can show basic ability to repay, an individual lender will be willing to put up the money at an interest rate that is mutually agreed upon.
- The borrower-lender arrangement is codified and recorded in a blockchain that is secure and permanent. Both borrower and lender have the security of knowing that their agreement cannot be changed except by mutual agreement.
- Re-payments are also recorded in the blockchain environment, so there is never a question about the amount or the ultimate meeting of a borrowing obligation to any individual lender.
The combination of P2P lending and blockchain technology can be a “win-win” for both borrower and lender. Borrower gets what he needs for that down payment. Lender gets a permanently recorded record of the actual repayment agreement and the interest rate to be charged.
This concept of merging crowdfunding and blockchain is spawning a new generation of lenders. Homelend have just launched a blockchain-based platform helping millennials to crowdsource their mortgage payment from friends and strangers. A “variation on this theme” comes from companies like The House Crowd, which allows anyone to invest in property development projects and earn an interest on your loan.
Beyond the Down Payment
It’s inevitable. Those who are in the market for mortgage loan funding, not just for a down payment, will ultimately choose to use P2P lending, backed by blockchain technology, for an entire mortgage loan. In fact, there are already crowdfunding groups that have been launched for this specific purpose.
Millennials will no longer have to see themselves as poor candidates for down payments or mortgage loans from traditional financial institutions. They will not have to suffer through the agony of providing exhaustive financial statements, itemising their debt, “begging” for exceptions to lenders’ “rules,” and facing the rejection that ultimately comes. They are open to these new alternative funding sources, as are the lenders who fund them.
Banks and mortgage lenders beware. A new day is coming. The methodologies for mortgage lending are changing. And millennials and the generation that follows are embracing them. It’s a new day for home buying – an agile, transparent, and cheaper way through P2P and blockchain.
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