Home equity line of credit

HELOCs became very popular in the United States in the early 2000s, in part because banks were using ad campaigns to encourage customers to take out home loans,[7] and because interest paid was typically deductible under federal and many state income tax laws.[8] This effectively reduced the cost of borrowing funds and offered an attractive tax incentive over traditional methods of borrowing such as credit cards. Whereas most mortgages are offered at fixed rates, HELOCs are usually offered at variable rates due to the flexibility embedded into a 10-year draw period where interest rates may change.

HELOC abuse is often cited as one cause of the subprime mortgage crisis in the United States.[9] In 2008 major home equity lenders including Bank of America, Countrywide Financial, Citigroup, JP Morgan Chase, National City Mortgage, Washington Mutual and Wells Fargo began informing borrowers that their home equity lines of credit had been frozen, reduced, suspended, rescinded or restricted in some other manner.[10] Falling housing prices have led to borrowers possessing reduced equity, which was perceived as an increased risk of foreclosure in the eyes of lenders.

After Tax Cuts and Jobs Act of 2017, interest on a HELOC is no longer deductible unless the loan is used for substantial home improvement.[11] After announcing they were no longer considering applications for HELOCs in 2020, JPMorgan Chase announced in May 2022 they were reconsidering it.[12]

Similarly to the US, the HELOC market in Canada grew by 20% a year in the early 2000s, representing $35 billion in 2000 to approximately $186 billion in 2012. Looking at non-mortgage consumer debt, the share of HELOCs grew from 10% to 40% in that time. To put this breakthrough into perspective, credit cards consistently represented around 15% of the market share through this period.[13] The main drivers for this evolving market were low-interest rates and sustained rising property prices.[14] Both conditions were favourable to customers, as the growing equity in their properties represented an excellent opportunity to secure larger and longer loans.

In the aftermath of the 2008 crisis, demand for HELOCs stabilized and grew by an average of 2% yearly.[15] This slower growth could be attributed to a lower demand, exceptionally low rates on mortgages and a more regulated market. Indeed, the recession has pushed the Canadian government to take measures aimed at mitigating the risks associated with taking a HELOC. Some of these measures may have impacted the growth of the HELOC market, limiting the demand on the customer side and making lending criteria tighter.

A 2011 decision to make HELOCs ineligible for government-backed “portfolio insurance” was one of them. This insurance was used by lenders to “securitize pooled mortgages through the National Housing Act Mortgage-Backed Securities (NHA MBS) program”.[16] Another measure was the Office of the Superintendent of Financial Institutions (OSFI) decision to cap the maximum LTV ratio for HELOCs at 65%, thus limiting the amounts homeowners could leverage from their property.[17] Underwriting rules were also made stricter through the Residential Mortgage Underwriting Practices and Procedures Guideline.[18]

Despite the proliferation of HELOC products in the US and Canada, the UK market did not have a similar product offering pre-2021. This is significant as the UK market has historically replicated innovative financial products developed in the US, such as credit cards or online payments.[19] This can be partly attributed to the fact that the UK banking system is highly consolidated with little product innovation among the major lenders.[20] This changed in the post-pandemic context, where innovation in the financial services industry has accelerated, with ‘fintechs’ introducing new products to the market.[21]

The first UK HELOC product was in 2021, by the fintech Selina Finance.[22] As of 2022, despite less than 5% per capita utilisation of HELOC products compared to mature, established markets such as the US and Canada, UK customers have shown increasing tendency to use HELOC products as a substitute to existing consumer finance tools. As a result, annual HELOC originations have increased fivefold, from $50m in 2021 to $250m in 2022.

In the UK however, offset mortgages have been common for many years, which is a primary form of lending against a property. The current companies that provide these products are Yorkshire Building Society, Coverntry Building Society, Clydesdale Bank & Accord Mortgages. A primary benefit of offset mortgages is that they have fee free options, whereas Selina Finance's option comes with a minimum fee of over £1300.