With so many homeowners feeling cramped as they worked and schooled from home, the market continued to heat up as the pandemic stretched on.
Facing low housing inventory, bidding wars over existing houses and housing prices climbing, homeowners looked to expand their current homes to find more space. It was an idea that many homeowners shared - soon, lenders were seeing a flood of homeowners looking to refinance their current homes in order to make improvements.
Home renovations are nothing new. But, in light of the pandemic, renovation spending is expected to increase significantly. In a recent survey by HomeStars, almost three quarters (74 per cent) of Canadian homeowners plan to improve their homes in 2021.
However, lenders are pulling back. As demand grew, lenders were tightening their requirements, and were turning away some buyers. Caught between protecting their investments and maintaining good customer relationships, lenders are finding it tougher to straddle the line.
Protecting Investments
Products do exist that allow lenders to take on business without fear of default, such as NFP's Equity Protection Program (EPP). With such protection, lenders are able to expand loan guidelines and offer a range of home equity products with less added risk. Borrowers whose risk portfolios are atypical can be serviced, and lenders can offer a number of loan options, including:
Unsecured home improvement loan: Eliminates the need to go through a costly and lengthy closing process. This helps because an unsecured loan usually comes at a higher interest rate, but the NFP EPP allows lenders to reduce interest rates, thus attracting more business. It also gives lenders the ability to extend the loan term, increasing the affordability for the homeowner.
Home equity line of credit (HELOC): Creates better customer retention as borrowers will be making payments, while also keeping that credit line available for future use.
Secured home improvement loan: Lenders can lend up to 133% of the property equity without increasing their risks.
EPP may give lenders:
- Protection against borrower default
- Expanded loan-to-value thresholds to 100%
- Elimination of costly foreclosure proceedings for the lender
- Balance sheet protection
- Ability to reduce capital requirements
- Opportunity to increase revenue and retain customers
Even in an uncertain lending landscape, lenders want to seek out new business. Still, doing so should not come with untenable amounts of loss exposure.
Financial institutions should be considering insurance products that offer protection from default and allow the business to grow with less concern about overextending on commitments. Both borrowers and lenders will benefit over the long term.