An article about Helocs in American Banker the day after Christmas begins with the opinion that “Americans who use their homes as ATMs are about to get hit with a sizable withdrawal fee,” referring to the removal of home equity interest deductions from income tax computations. First, any person actually taking cash withdrawals from a home equity account to meet living expenses is most likely already in financial distress that no tax credit can rectify. And according to tax experts, the only interest deduction allowed until now has been for funds used on home improvements—those used to purchase automobiles or withdrawn as though from an ATM don’t exactly qualify, even though many consumers with home equity loans overlooked that distinction.
For consumers, home equity loans (and a standard deduction for student loan interest) have been the only personal loans eligible for tax credits since credit cards, auto loans, and the like were removed by the Tax Reform Act of 1986. By the end of 2016, the home equity portfolio balance (from which lender income is earned) tallied just about US$500 billion less than it did pre-recession, when the portfolio briefly flirted with US$1 trillion. In 2017, financial institutions’ home equity loan portfolio balances continued to decline, with no indication of a turnaround.
However, what we are hearing from banks and other FIs is that Helocs, or home equity lines of credit (what you could actually access at an ATM if your lender allows debit card drafts), are becoming very popular as housing prices continue to rise. Generally speaking, interest rates and terms on these accounts are usually much more favorable than those on credit card or big-ticket loans. It is likely that most consumers wanting a Heloc are not looking at it specifically for its tax deductibility—that has just been a nice side benefit. FIs are eager to make these secured loans, interest rates are low enough to encourage borrowing, and consumers of all ages are spending and borrowing.
For example, baby boomers are collectively sitting on US$6 trillion in home equity, often without a mortgage or a very low one, and will very likely find Helocs an excellent retirement planning tool with their easy access to cash—when and if needed—at favorable interest rates. And consumers, especially young millennials (who are the largest group of first-time homebuyers and the smallest group of homeownership households), still have an option to refinance a home with a cash-out option, while interest rates remain low and housing values rise, that would provide a home mortgage interest deduction and the opportunity to self-lend. If borrowers want to avoid fees, Helocs are a cost-effective option.
FIs looking to grow wallet share, especially with existing customers, shouldn’t let the tax hype derail their 2018 Heloc marketing plans. Just plan to do a good job at presenting the loan’s benefits, perhaps tailor it to generational needs, and don’t accept more credit risk than prudent policies allow.
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