Non-Salient Fees in the Mortgage Market

60 Pages Posted: 17 Aug 2019

See all articles by Lu Liu

Lu Liu

University of Pennsylvania - Finance Department

Date Written: July 10, 2019


This paper studies supply-side product pricing when consumers underreact to non-salient fees. Using comprehensive data on issued and offered mortgages in the UK, I document that lenders differ substantially in the fees they charge, and that borrowers appear less overall cost-sensitive to products with fees. In order to distinguish from demand factors such as unobservable preferences or product characteristics, I show that lenders pass on firm-specific funding cost shocks via fees, but not interest rates, consistent with strategic pricing of fees, and maintaining competitive prices in the salient price dimension, interest rates. I further find heterogeneity in pricing across lenders: those who rely on high fees tend to have higher funding cost, lower return on equity and larger branch networks, in line with a specialization equilibrium in which high-cost lenders are able to match with less cost-sensitive consumers.

Keywords: mortgages, household finance, price dispersion, salience, strategic pricing

JEL Classification: G21, G41, D12, D14, D18

Suggested Citation

Liu, Lu, Non-Salient Fees in the Mortgage Market (July 10, 2019). Available at SSRN: or

Lu Liu (Contact Author)

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

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