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Interest-Rate Fee Substitution: Credit Facilitation in Segmented Markets

Author

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  • Cocco, João F.
  • Naaraayanan, Lakshmi
  • Tripathy, Jagdish

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.

Suggested Citation

  • Cocco, João F. & Naaraayanan, Lakshmi & Tripathy, Jagdish, 2026. "Interest-Rate Fee Substitution: Credit Facilitation in Segmented Markets," CEPR Discussion Papers 21347, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:21347
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    File URL: https://cepr.org/publications/DP21347
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    Keywords

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    JEL classification:

    • D1 - Microeconomics - - Household Behavior
    • G5 - Financial Economics - - Household Finance
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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