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The future remains bright for HELOCs

Home equity levels have reached record levels, and theoretically that should translate into more borrowers tapping equity through second loans and home equity lines of credit (HELOCs). Jon Giles, senior vice president of home equity at TD Bank, discussed whether borrowers are, in fact, tapping their equity, and also shared his outlook for home equity products.

Have you seen an uptick in interest in home equity loans and lines of credit lately?  


We have seen that rise in equity levels. Over the past year, though, from 2017 to 2018, the industry has seen a slight dip in customer demand. That is likely tied to the upturn in interest rates as fewer customers are taking out first lien [cash-out refinances]. Second liens are still remaining fairly strong. Overall, though, I would say demand remains at healthy levels. We expect 2019 to be pretty similar to what we are seeing this year. So home equity [products] continue to be one of the lower-cost ways to borrow, particularly if you are borrowing a larger amount. So, healthy environment, but a slight dip year over year.

What is the interest rate effect? Is it that people do not want to draw down on equity because it has become slightly more expensive?

We are seeing two things. You have some customers who look at rates. Prime last week moved to 5.25 percent. We had been at 5. The good news is that we are still at historical lows. If a customer has the need to do home improvements, to do debt consolidation, to finance college, it is still one of the cheapest means to do that. It is a very viable product for customer needs. At the same time, it is just a little bit higher than it was just a few months or a year ago.

Data from tracking companies suggests it is still very difficult to obtain a HELOC. Is that true?

The industry has made a lot of progress. TD Bank and the industry in general are moving toward more features and applications that are benefiting the customer. For instance, today most of us have improved our digital offerings. Once you have applied, you can upload your income verification. You can converse with your underwriter or processor through e-mail. You can look and see the status of your application. In the last few years, we have actually reduced the time to underwrite and close [a HELOC] and have made the process easier. I think we will continue to see that progress in the coming years as well.

You still have to have excellent credit to obtain a second-lien loan or HELOC, though, right?

Most banks are going to look at FICOs [credit scores] in the mid- to upper-600s and above. You do need to have strong credit to qualify. And one thing that we always stress is that customers and homeowners should monitor their scores. They should understand the dynamics that influence their FICO, because with that higher credit score will come lower interest rates. So, it is not just a matter of qualifying, but putting yourself in the best position. We do recommend that homeowners check their FICO score often, know how to manage that score and understand what that score is before they come in.

What are the conditions that are spurring demand for HELOCs?

A couple really come into play. No. 1, the equity in homes is at an all-time high, so homeowners have that equity to borrow against. The second thing is consumer confidence. It is fairly high right now. Through some surveys, we have seen that many customers expect to do home remodeling or make purchases going forward. The other thing we have seen that is very interesting — TD does a home equity survey in the spring — and we saw that 59 percent of respondants said they haven’t used home equity in the past, and they aren’t that familiar with home equity. One thing we try to do is do more education around that being a borrowing option. Particularly for a larger purchase or a larger home improvement, it is a sensible way to borrow. We think the demand is going to come from the strong economy, the historically low rates, and the fact that it is one of the least expensive ways to borrow. 

HELOCs and home equity loans got a black eye during the 2008 financial meltdown and housing crash. What has changed?  

The positive news there is that customers have become more knowledgeable, and banks have grown in how we underwrite. Prior to 2008, many banks would lend above 90 percent combined loan-to-value [LTV] of the property. Most of us have gotten away from that. The standard home equity [product lends] up to 80 percent [LTV], with some going as high as 90 [percent] — but not above 90 [percent] as it was in the past. Add on top of that much more diligence around affordability, making sure that somebody has a debt-to-income ratio that is affordable for them — even looking at what the total line-amount cost could be for the borrower. The banks have improved their underwriting. Customers are more knowledgeable about process. Put those two together, and we are in a better spot than we were as an industry 10 years ago.  

Are you seeing any change in the way homeowners are spending their home equity?

We often do surveys of our customers to define what their primary uses are. It is amazing how consistent that has been over the years. We continue to see the main use of home equity is home improvement, home remodeling, different issues with your home. At the same time, we have consistently seen [HELOCs used for] debt consolidation, education expenses and other types of large expenses that may come up. It has been amazingly stable and consistent the last multiple years. I have been in this business for 20 years, and it has been fairly consistent during that time frame.

The tax overhaul last year placed some limits on the deductibility of home equity products. Will that have any impact on volumes?

It has had some impact. You still have that tax deductibility, depending on the use. Home improvement, for instance, is still deductible. With other types of uses, it continues to be one of the cheapest ways, if not the cheapest way, for most borrowers to borrow a significant sum, say, $15,000 to $50,000. From a total-cost perspective, home equity is still a strong way to borrow. For other cases, such as home improvement, you have that added benefit of tax deductibility. Of course, each borrower is going to have to consult their tax adviser to understand their individual circumstances. 


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