Interest-Rate Fee Substitution: Credit Facilitation in Segmented Markets

Cocco, João F., Lakshmi Naaraayanan and Jagdish Tripathy

No 21347, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We use administrative data covering the universe of mortgage originations to individual real estate investors in the United Kingdom to study financing outcomes following a large, unanticipated increase in interest rates. Post-shock, originations become more concentrated among specialist lenders, who exhibit lower interest rate pass-through for larger borrowers. To offset these smaller rate increases, they charge higher loan fees, thereby attenuating the impact of higher rates on interest-coverage ratios and facilitating credit. High-frequency evidence from loans on offer show similar responses, indicating that specialist lenders adjust product design to target specific borrower types and, in doing so, reinforce market segmentation.

Keywords: Mortgages; Interest rates; Underwriting; Market segmentation (search for similar items in EconPapers)
JEL-codes: D1 E43 G5 R21 (search for similar items in EconPapers)
Date: 2026-03
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