Hydrothermal liquefaction (HTL) is a promising technique for converting biomass feedstocks to fuel and fine chemicals. A metallic Fe additive increases the water-soluble (WS) products of HTL, although the mechanism is unclear. Herein, commercially available carbohydrates (poly- and monosaccharides) and lignin isolated by enzymatic saccharification of palm empty fruit bunch were used as model substrates in the evaluation of the effect of Fe on HTL product composition. For carbohydrates, Fe and oxidized Fe synergistically contributed to the production of light compounds in the WS fraction by accelerating the retro-aldol condensation of sugars and suppressing the recondensation of unstable intermediates. The reactive intermediates could be stabilized by an electron-transfer-type reduction. On the other hand, Fe showed minimal effect on the HTL of enzymatic lignin, which was mainly converted to water-insoluble products. The results for the model substrates provided a picture of the overall pathway of Fe-assisted HTL of biomass.