With interest rates on the rise and the springtime home improvement season nearly upon us, home equity lines of credit (HELOCs) and home equity loans are expected to be big business for local lenders in 2016.
Through the end of November 2015 (the most recent month for which data is available), single-family and condominium owners in Middlesex County took out 2,801 HELOCs, according to The Warren Group, publisher of Banker & Tradesman. In Middlesex, the state’s most populous county, the average HELOC amount was $235,171, and was taken an average of 18.75 years after the home was purchased.
Traditionally hot markets like Newton, Lexington and Arlington were the municipalities where homeowners took out the most HELOCs, but on average, there were 46 HELOCs in each city or town in the county.
With home values on the rise in most of the 351 cities and towns across the state, HELOCs are a big market and traditionally, rate-conscious consumers have made lenders compete for their business.
William Mullin, executive vice president at Dedham Savings Bank, said the bank was very busy in 2015, and though the HELOC market is very competitive, he considers other local banks his main competition and he doesn’t lose a lot of sleep worrying about them.
“Because we are a community bank, we have a lot more loyalty and customers are a lot stickier for us,” Mullin said. “For a big number of our HELOC customers, we also have their first mortgage. We’re fortunate in that. It’s part of looking for the whole relationship with the consumer. Our customers are very loyal.”
That’s true of larger banks as well, said Brendan Coughlin, president of consumer lending at Citizens Bank, the 13th largest bank in the U.S. by assets.
“Almost all of our HELOC customers have a relationship to the bank,” he said. “About 75 percent of our home equity business comes from checking customers.” And if the HELOC customer isn’t already a Citizens member, he added, “we use this product as a lead to acquire a full-service relationship.”
But community banks may want to look beyond their backyards for competition creeping in; the nationals have plans to aggressively move into the local market as the economy heats up and equity rises. Larger banks are looking to increase their share of the HELOC market, according to Coughlin.
“It’s an extraordinarily competitive market and it’s heating up as consumer confidence increases,” he said. “Banks are getting more confident to be bullish in this space.”
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Citizens is ranked sixth in home equity lending nationally, and Coughlin expects the HELOC market to get even more competitive this year.
“Although post-credit crisis, the market was largely dominated by smaller community players, the big nationals are getting back into it,” he said. “Because home values are appreciating and customers have more equity, HELOCs have lower interest rates than other debts, and consumer confidence is improving.
What’s A HELOC For?
John Brodrick, senior vice president of consumer lending for Eastern Bank, the largest community bank in Massachusetts, said both HELOCs and home equity loans will be even more popular this year than last because many homeowners have more equity to borrow against. In addition, consumers will want to take advantage of today’s low interest rates, which are expected to rise in 2016.
Brodrick said that while there are no restrictions on how the money can be used, the overwhelming majority of HELOC and home equity customers use the money in one of three ways.
“Far and away the most common reason for people to take out a HELOC is for home improvements,” Brodrick said. “Number two is debt consolidation and number three is education.”
He added that HELOC borrowers in particular often take out a line of credit in anticipation of big-ticket repairs.
“They tend to be people who are fairly astute in their finances, who have considered their options and have their first mortgage well-managed,” he said. “Often, they want the money for home improvement or they want it in the event that something happens down the road, so the credit is there when the roof leaks or if the boiler goes.”
Citizens’ Coughlin said it’s more than rising equity that is spurring the market – the memory of the drop in home values during the recession and the fear it induced may also be a factor. Some homeowners are more comfortable renovating their current homes or building an addition, rather than risking the move to a larger, more expensive home, he said.
Citizens’ customers report that they use HELOC money in similar ways and ratios as Brodrick said his customers do. The average Citizens’ HELOC is a little over $100,000 and a “large majority” of borrowers are in their 50s or 60s and have paid off the primary mortgage.
“About 30 percent of our customers use the money for home improvement and about 30 percent use it for debt consolidation,” Coughlin said. “About 20 percent of the time it is used for education purposes and about 20 percent take it as an emergency line and don’t use the money right away.”
HELOCs offer interest-only options for the first 10 years, after which the much higher interest and principal payments begin. Some consumers make interest-only payments for that period of time and then take out a similar HELOC from another bank to pay off the first one, and do the same thing all over again.
That’s particularly relevant in 2016, when HELOCs taken out just before the market crashed will be coming due.
As the housing market heals, equity rises and borrowers feel a little more secure, lenders say they’re seeing a new level of frugality in the use of HELOC funds. While banks have no way of knowing for sure what customers are spending their HELOCs on – or even if they’re spending them at all – survey responses indicate that fewer customers are using the money for things like boats and vacations.
“We’re seeing a flight to responsibility,” Coughlin said. “Consumers are using it more responsibly.”
Just as well; bankers don’t recommend using the funds for fun. Brodrick said Eastern would not “advise using the money to buy a depreciating asset like a boat or a car.”
