Homeowners are staying in their homes longer and amassing considerable amounts of home equity. Plus, with rising interest rates providing a disincentive to move, some may look to renovate rather than relocate to hold on to their low mortgage rate – and a great way to do that is with a home equity loan.
That’s the case some market analysts have made when predicting a sizable uptick in home equity lending in the 2019.
But while the argument may be compelling, some – like Bank of America’s David Doyle – say it’s not enough.
“There’s a case for it, and there’s a case against it,” said Doyle, senior vice president of consumer lending at BofA. “But I don’t think we’re likely to see an appreciable increase in the level of home equity lending in 2019.”
Here’s why:
1. Rising rates have made home equity loans more expensive than before.
“The preponderance of the product that is originated in the home equity category is variable-rate line of credit, and most all of that variable-rate credit is based on the prime rate as the index, and that’s gone from 3.25 to 5.25.”
2. The end-of-draw effect is coming to a close.
“A meaningful portion of home equity originations over the last three to four years has been refinance activity of previously originated lines of credit – pre-crisis – when home equity category volumes were very, very strong. A lot of that 10-year draw, 15-year repay product has reached the end-of-draw event, and so those consumers who were able to refinance those lines did. That contributed to category size, and that largely drops away in 2019.”
3. Consumers are disinclined to tap their equity.
“There’s an inclination that’s pretty strong among consumers to bank the equity that they’ve gained, not create liquidity with it, not spend it, but instead it’s a form of deleveraging part of the household balance sheet.”
But while Doyle said he does not predict a wave of home equity lending in the year ahead, he did say several factors will offset the decline in the category set into motion by the end-of-draw event.
Homeowners are likely to move less thanks to rising rates and low inventory, and Doyle said that will keep home renovation activity fairly strong.
“Home renovation is probably going to be a driver within the home equity category because the product is so terrific for it,” he said.
“We do not predict it will explode,” Doyle added, “but we do think the rational, intelligent uses of the credit will continue to grow while overall volume may look a little bit flat because of the dissipation of the end-of-draw effect on industry volumes.”
