The COVID pandemic affected every industry in one way or another, changing the way financial institutions do business for good. In the financial industry, we saw several major banks abandon HELOC lending, loss reserves dramatically increase, credit standards tighten, secondary market shrinkage for certain products like jumbo loans and non-QM loans, and the forced adoption of self-serve capabilities.
Today, we’re seeing recovery taking shape: banks and credit unions are flush with cash to lend and are thirsty for revenue. Meanwhile, unemployment is retreating, the minimum wage is increasing, home values are appreciating with competitive rates, there’s competition from the marketplace and online lenders, and rate and loan shopping has never been easier. The lending landscape has changed along with everything else, so it’s important for financial institutions to keep up with changing trends and consumer behavior to stay profitable.
HELOC buyer behavior trends
Miniter Group conducted a survey designed to help banks understand the customer’s experience and expectations from the HELOC shopping phase through the loan closing.
About two-thirds of respondents were looking to borrow less than $60,000. More than half of the respondents were looking to finance a short-term need such as home improvements. The loan product mix was skewed toward unsecured personal loans, whereas in 2019, HELOCs were favored.
Observation 1: Incumbency and local presence matter
60% of respondents who opened their HELOC already had a mortgage at the same bank, which is almost double the rates of those who opened a HELOC at a different bank.
A two-to-one majority selected their primary bank for a HELOC over another local or non-local bank.
50% applied to only one lender, which indicates that half of consumers didn’t price shop for their HELOC.
What this means: Non-incumbents face a variety of challenges when it comes to pulling people away from working with their primary/local financial institution. However primary banks cannot be complacent either—it’s easy for consumers to shop around online.
Observation 2: Relationships matter (but price matters more!)
78% of respondents said they would not be willing to pay more for a loan from a bank whose reputation was stronger.
70% confirmed they would switch from their primary bank based on price.
73% of $100,000+ borrowers indicated that promotional rates made them more likely to apply for a HELOC.
What this means: It’s easy for customers to churn with the presence of marketplace and online financial institutions and accessible price shopping.
Observation 3: Shopper behavior varies enormously
70% of respondents research two or more lenders and included online/marketplace lenders and lender comparison websites in their research.
What this means: Continuously optimizing your prices in response to market dynamics is essential to maintain a competitive position. Pricing should be driven by real-time data and a digital approach to stay relevant.
How to stay relevant in the market
If you’re an incumbent, you may need to start bundling other services or benefits to keep your current customers away from the low-price lenders. But beware, there are constantly new players in the market to keep an eye on. You have to be agile and change with the market to stay on top.
Focus on dynamic pricing
Borrowers are comparison shoppers, meaning that a digital approach and a dynamic pricing strategy are a must. Financial institutions can better compete by offering promotional and behavioral pricing such as:
Time-bound teaser rates or “specials” and introductory rates
Segment-based promotions for specific markets
Engagement-based or behavioral pricing to reward customers that deepen their engagement with the bank
Segment your customers
In order to target each segment and demographic found within your current or targeted customer base, financial institutions need to optimize marketing and pricing strategies and make them specific to each group. You’ll need sophisticated segmentation approaches to tailor offers to each borrower segment.
Offer digital options
The vast majority of consumers today expect to be able to apply for a loan and submit any required documents online. This is often in the form of a user portal, which when coupled with interaction with a lending specialist is exactly the experience that many consumers are looking for. Convenience is key, but adding a human aspect back into the digital experience is important too.
Optimizing HELOC product offerings to satisfy borrower needs
It’s important that as a financial institution, you provide robust consumer lending options to customers who may require higher than existing loan-to-value parameters and/or additional flexibility of other underwriting eligibility. Offering loans with expanded loan criteria affords your institution the ability to meet your customers’ needs and strengthen relationships while keeping them from shopping around. On top of that, creating cross-selling opportunities offers a lot more value to both you and the customer over time.
To hear more of the stats pulled from the survey and to listen to Keith discuss ways that financial institutions can pivot to satisfy borrower needs, check out the webinar!
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