Home improvement loans: growth opportunities and challenges

As mortgage rates began ramping up in early 2022, leaving borrowers with virtually no incentive to refinance, a wave of nonbanks introduced home equity lines of credit, a popular funding source for home remodeling projects. HELOC originations also saw a surge at the same time. But with rates accelerating even higher over the past 12 months across all types of consumer loans, the enthusiasm surrounding HELOCs subsided. 

The majority of HELOCs come with variable rate terms and are currently running at an average of close to 9%. Tied to the going prime rate, HELOC averages rise and fall with policy decisions of the Federal Reserve.

As the central bank raised its rate over the past several months, TransUnion found HELOC originations had decreased by 14% annually by the first quarter this year, mirroring trends also observed by the Fed and analysts at Curinos, the data intelligence provider serving financial services. 

The decline in originations also coincided with a shift in priorities among borrowers at the Bank of Oklahoma in the midst of inflation and rising rates, according to Tanya Ball, its home loans regional director. While the bank’s marketing campaigns in 2022 showed clients holding strong interest in using HELOCs to fix up their properties, other economic priorities have come to the fore more recently. 

“What we’re seeing — the majority — is debt consolidation right now. Home renovation took a little bit of a backseat,” Ball said.

And in spite of the recent growth of HELOC originations, a “surprisingly high number” of borrowers never drew from their equity, according to Ken Flaherty, manager, home equity, at Curinos.

“We’ve seen an increase in the total of non-utilized HELOCs come on lenders books, simply because they like to have one, but they don’t necessarily have the appetite to take a draw,” he said, an indication consumers may see them as a rainy day fund.

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