Home Improvement Loans: Growth Opportunities and Challenges

As mortgage rates begin to rise in early 2022 and debtors have little incentive to refinance, a wave of non-bank Introducing a home equity line of creditis a popular source of funding for home improvement projects. The origins of HELOCs also saw a surge. But as interest rates on all types of consumer loans accelerated over the past 12 months, the enthusiasm surrounding HELOCs has faded.

Most HELOCs have variable-rate terms, with the average interest rate currently approaching 9%. Tied to the prevailing prime rate, average HELOC interest rates rise and fall with the Federal Reserve’s policy decisions.

As central banks have raised interest rates over the past few months, TransUnion sees 14% reduction in HELOC sources each year through the first quarter of this year, reflecting a trend also observed by analysts at the Federal Reserve and financial services data intelligence provider Curinos.

Tanya Ball, regional director of home lending at Bank of Oklahoma, said the decline in the number of sources coincides with a shift in the priorities of Bank of Oklahoma voters amid rising inflation and interest rates. While the bank’s 2022 marketing campaign shows strong customer interest in using HELOCs to rehabilitate their properties, other economic priorities have come to the fore recently.

“What we’re seeing now – mostly – is debt consolidation. Home renovations have taken a bit of a backseat,” Ball said.

Ken Flaherty, Curinos home equity manager, said that despite the recent growth in HELOC originations, a “surprising number” of borrowers have never withdrawn their equity.

“We’re seeing an increase in the total number of unused HELOCs on lenders’ books simply because they like having one, but they’re not necessarily interested in withdrawing it,” he said. This suggests consumers may view them as emergency funds.

“Size is increasing. But actual usage is going down,” he said, noting that the gap between HELOC size and utilization has grown over the past decade.

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