What is a Tracker Mortgage?

Malcolm Tatum

A tracker mortgage is a type of mortgage that is closely associated with shifts in the current average interest rate. While very similar to a floating or variable-rate mortgage that adjusts on a monthly basis, the tracker variety is reviewed and adjusted every two calendar weeks. In the United Kingdom, the adjustment of the rate on this type of mortgage is associated with the current base interest rate identified by the Bank of England.

Variations in average interest rate are reflected in a tracker mortgage on a biweekly basis.
Variations in average interest rate are reflected in a tracker mortgage on a biweekly basis.

With a tracker mortgage, the terms of the contract call for maintaining a fixed percentage above the current rate of interest. The tracker rate changes as the rate of interest shifts upward or downward. For example, if the fixed percentage is set at one percent and the current average rate is four percent, the rate of interest assessed on the mortgage balance is five percent. If the average rate increases during the next period to five percent, then the interest applied to the mortgage balance during that period is six percent.

A tracker mortgage offers a couple of benefits over the variable-rate mortgage. One has to do with the frequency that the applied interest rate changes. Most floating or variable-rate mortgages adjust the interest applied no more than once or twice a year, although a few will do so on a monthly or quarterly basis. In contrast, the tracker mortgage is likely to shift the interest rate biweekly. Another is that even with mortgages that carry variable interest rates, there is often a floor on the rate of interest that cannot be exceeded. With the tracker approach, the rate applied will always adjust to keep the same balance with the current average rate, no matter how low that average rate may plunge.

A tracker mortgage approach makes sense when there is ample evidence that average interest rates are likely to remain stable for an extended period of time, or that interest rates are about to enter a period of decline that will last of at least a few years. During this time, the borrower can enjoy the benefits of relatively low interest on the mortgage balance, a factor that may actually help expedite settling the mortgage ahead of schedule. Depending on the exact terms of the tracker mortgage, it may be possible to roll the current agreement into a fixed rate mortgage, if the borrower believes that the average mortgage rates are about to climb and continue climbing for some time. If not, the homeowner may still be able to consider refinancing the existing mortgage as a means to lock in a fixed rate and avoid the negative impact of constantly climbing interest rates.

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