How HELOCs Help Credit Unions Diversify & Serve their Members
Learn how credit unions can use HELOCs and HELOANS to diversify their lending portfolio and help members take full advantage of their equity.
This article was originally published in CUInsights.
Although evidence is continuing to mount that the Fed is winning its battle against inflation, mortgage interest rates keep rising. This has been a difficult year for the real estate market – mortgage demand recently hit multi-decade lows thanks to persistently high rates and low inventory. While this poses challenges for credit unions, there are also significant business opportunities that can help them navigate a high-rate environment and serve their members.
For example, even though HELOC rates have surged, homeowners remain very interested in leveraging the value of their homes to pursue their financial goals. Credit unions can use HELOCs and HELOANS to diversify their lending portfolio by helping members take full advantage of their equity. This results in higher member satisfaction and retention while giving credit unions access to a substantial new source of profit.
Despite the decline in mortgage originations, home values remain robust. Many homeowners feel locked into their current mortgages, which has led to the decline of inventory and the corresponding drop in originations. But credit unions have many ways to take advantage of high interest rates and better serve their members.
Why HELOCs and HELOANs are on the rise
It’s no wonder that mortgage originations are down – potential homebuyers have fewer options, valuations remain high, and interest rates are still in the stratosphere. However, homeowners are now sitting on more than $31 trillion in equity. While this number is down slightly from its peak in the second quarter of 2022, the trend line is back on the upswing after a reversal between Q2 2022 and Q1 2023.
Many homeowners want to put their equity to work to finance home improvements, consolidate debt, and meet other financial obligations. Beyond providing immediate access to funds at much more attractive interest rates than they’ll get from other forms of debt (with credit cards, for instance), homeowners are also able to deduct mortgage interest at tax time. These are a few of the reasons lenders expect annualized HELOC debt to increase by 8.2 percent this year and almost 10 percent in 2024.
In the second quarter of 2023, total household debt reached $17.06 trillion. Credit card balances alone increased by $45 billion, bringing the total to an all-time high of $1.03 trillion. Members who need access to funds can use HELOCs to consolidate their debt and secure their financial objectives, and credit unions need to make sure they’re aware of this option.
Engaging with members about HELOCs and HELOANs
The past 18 months may have been stressful for members. Stubbornly high inflation has made it more difficult to pay for necessities like groceries and gas, rising interest rates have forced homeowners and homebuyers to change their plans (by delaying a purchase or staying put longer than expected, for instance), and the threat of recession has loomed over all the above. While these circumstances aren’t ideal, they present an opportunity for credit unions to deepen relationships with members by offering strategic guidance on how to leverage their home equity.
A survey of U.S. homeowners found that 57 percent are familiar with HELOCs, while 45 percent say they’re very (17 percent) or somewhat (28 percent) likely to apply for one within the next three years. Homeowners would be more inclined to apply for a HELOC if they were familiar with what this would entail. Credit unions need to ensure that members understand what HELOCs are and how they can be used – knowledge that will help them make informed decisions about the deployment of their home equity.
From Q1 2022 to Q1 2023, Competiscan reports that the proportion of mail volume dedicated to home equity spiked from 18 percent to 38 percent. At a time when home equity is near record levels, it’s no surprise that nonbank lenders, banks, and credit unions are focused on communicating how home equity can be leveraged as a financial solution.
HELOCs are flexible financial tools
Homeowners are increasingly using home equity for renovations and other home-related projects.. And although the top-cited use of HELOCs is for home improvement, homeowners say they would deploy their equity in many other ways: for unexpected expenses, debt consolidation, living expenses, and college tuition. Informing members about this wide array of options is a key part of home equity education.
Just as HELOCs are useful instruments for homeowners who want to put their equity to work, they’re also vital resources for credit unions at a time when mortgage and refi originations are depressed. As mortgage and refi originations plummeted in 2022, HELOCs increased by 50 percent compared to two years earlier. While home equity loan debt is projected to decrease in 2024, HELOC debt is expected to keep rising – a testament to the popularity of HELOCs among homeowners. HELOCs will also help credit unions become more future-oriented. Sixty percent of Gen Z and 77 percent of Millennial homeowners who know about HELOCs say they’re likely to apply for one within the next three years – proportions that fall to 42 percent and 20 percent for Gen X and Boomers, respectively.
As credit unions consider the routes that will help them navigate a difficult housing market and high interest rates, they need to support members while finding new ways to generate sustainable revenue. HELOCs will help them work toward both goals at the same time.