HELOC Tax Deduction Suspension

The new tax law suspends the deduction on interest for home equity loans and home equity lines of credit (HELOCs). According to American Banker:

"Under the old law, homeowners who took out a second loan of up to $100,000 could deduct the interest from their taxes. That provided an incentive for consumers to use home equity products—instead of other types of loans—to finance everything from car purchases to higher education to the consolidation of credit card debt. The new law suspends that favorable tax treatment between 2018 and 2025. The change applies not only to homeowners who take out new home equity loans, but also those who already have them."

Although demand for HELOCs has eased over the past several years, with low default rates and decent returns, they have been among the most profitable consumer banking products, and a great mass market relationship hub for many banks and credit unions, especially those with significant real estate lending volume.

The ending of the tax deduction ends one of the key benefits driving the offerings. Any bank with a significant concentration of HE/HELOC could be impacted negatively. The tax change could also drive a temporary spike in first mortgage refinance and future volume of consumer credit favoring other credit options including credit card and auto loans.

This underscores the importance to community banks and credit unions of having a strong payments (debit and credit) offering to counteract any potential negative impact from a decline in home equity borrowing.

Sam Kilmer
Senior Director
Cornerstone Advisors