Staff Paper on Interest-Rate Fee Substitution and Credit Facilitation

Bank of England News

Published March 20th, 2026

Detected March 21st, 2026

Summary

The Bank of England has published a staff working paper exploring how specialist lenders adjusted loan fees to facilitate credit in segmented mortgage markets following an interest rate increase. The paper uses administrative data from the UK to analyze financing outcomes and product design adjustments.

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What changed

This Bank of England staff working paper, published on March 20, 2026, analyzes the impact of interest rate increases on the UK mortgage market. It finds that specialist lenders adjusted their product designs by charging higher loan fees to offset smaller interest rate pass-throughs, thereby facilitating credit and maintaining interest-coverage ratios for certain borrower types. The research utilizes administrative data on mortgage originations to individual real estate investors.

This document is a research paper intended to stimulate debate and does not impose new regulatory requirements. Compliance officers should note the findings regarding market segmentation and lender responses to interest rate changes, which may inform risk assessments and strategic planning. No immediate actions are required by regulated entities, as this is a non-binding research publication.

Source document (simplified)

Interest-rate fee substitution: credit facilitation in segmented markets

Staff working papers set out research in progress by our staff, with the aim of encouraging comments and debate.

Published on

20 March 2026

Staff Working Paper No. 1,176

By João Cocco, S Lakshmi Naaraayanan and Jagdish Tripathy

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.

Interest-rate fee substitution: credit facilitation in segmented markets