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09/20/2017

Lending in Rising Rate Environment: A Look at HELOCs

Trevor Rasmussen September 20th, 2017
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Marketing Insights

Of course, there’s no such thing as free money, but the historically low interest rates of the past few years have been about as close as most consumers will ever get to the concept. Those low rates meant many consumers decided it was worth a few bucks in closing costs to refinance their higher-rate variable or fixed mortgages into something that would cost them a lot less interest over the life of the loan.

Now, that pesky, interfering Fed has raised its federal funds rate — and interest rates are going along for the ride. Many consumers who might have been in the refi market just a year ago will likely decide they’re better off with the loans they have, rather than taking a chance that rates will continue to rise. When homeowners become wary of rising rates, refi business dries up for financial institutions.

When refinancing business dwindles, and the new mortgage market becomes even more competitive, banks need to find other profitable lending opportunities. Our upcoming webinar, Top Lending Strategies in a Rising Rate Environment, aims to help financial institutions uncover opportunities to help them offset the probable downturn in these areas. You’ll hear from top economist Mark Zandi from Moody’s Analytics, as well as Deluxe’s own Chief Data Scientist Kesna Lawrence as they discuss the changing environment and how FIs strategies should be shifting for success in 2018.

One opportunity that is well worth the investment — that we’ll cover in the webinar — is home equity lines of credit.

HELOC outlook

As more consumers try to get access to money without touching their historically low mortgage rates, they’ll likely turn to HELOCs to get the cash they need for home improvement projects and other important financial objectives. A HELOC can be a very appealing route for equity-rich homeowners who are struggling to pay off other forms of higher-interest debt.

Currently, the total balances on HELOCs were flat in Q2, standing at around $452 billion, according to the Federal Reserve Bank of New York. Meanwhile, other types of non-housing debt, including credit cards and auto loans, rose in the second quarter of the year. The significantly higher interest rates on credit cards and auto loans may have many consumers looking for ways to roll those debts into a less costly credit vehicle — and HELOCs could be the answer for many homeowners.

Tapping the growing market

Too many consumers are unaware HELOCs are even an option for them, and their ignorance poses a challenge to financial institutions looking to maximize opportunities in the HELOC marketplace. Education will play a big role in helping banks tap this market; those that do an outstanding job of raising account-holder awareness of HELOC benefits stand to reap the lion’s share of the business.

Forty percent of existing HELOC accounts actually carry a zero balance. As interest rates rise, it’s the perfect time for banks to reach out to the holders of those dormant accounts and remind them of the relatively lower-cost credit available to them. Data modeling can help financial institutions identify owners of inactive HELOCs whose financial objectives might make them candidates to begin using that dormant credit. For example, homeowners with high credit card debt may think they’re in the market for a personal loan to lower their interest costs when a HELOC might actually reduce their costs even further. Opportunities will also emerge surrounding the refinancing of existing HELOCs for those with high rates, or approaching balloon payments.

Navigating the tide of rising interest rates will require financial institutions to explore new opportunities and innovate existing ones. How to optimize HELOC opportunities will be one of the useful rising-rate lending strategies we’ll discuss in the seminar. Register TODAY for our September 21 webinar to learn more about lending strategies in a rising-rate environment. Even if you are booked at this time, we’ll send you the recording and the deck for you to review when you have time.