An interest offset mortgage combines saving account deposits and a mortgage in one line of credit account.

Each month, the lender looks at how much you owe on the mortgage and then deducts the amount you have in savings. You pay mortgage interest just on the difference between the two. For example, if you have a mortgage of $100,000 and savings of $10,000, your mortgage interest is calculated on $90,000 for that month.

This cuts the amount of interest you pay but the mortgage rate is likely to be more expensive than on other deals. You can still access your savings if you need to but the more you offset, the quicker you’ll repay your mortgage.

Unlike most mortgages, offset mortgages calculate interest daily as opposed to monthly. That ensures deposits immediately offset debt, with the aim being greater interest savings. 

National Bank’s All-in-One and Manulife’s One are two popular examples of offset mortgages.

Conventional, high-ratio or alternative mortgage? Fixed or variable rate? Open or closed? They’re all questions you’ll have to answer as you evaluate your options and choose a mortgage to meet your needs.

Whether you’re about to buy a new home or your mortgage is up for renewal, it is beneficial that you understand all of the different mortgage products and options you have available in your new home or investment property purchase.

Read our Different Types of Mortgage Explained post where you can find simple explanations of some mortgage products and options.

What is a Conventional Mortgage?

The term conventional mortgage refers to a mortgage that does not carry any form of high-ratio or lender insurance premium.

A conventional mortgage means your down payment is 20% or more of the property’s value. With a conventional mortgage, you don’t need to buy mortgage insurance.

What is a High-Ratio Mortgage?

The Bank Act of Canada requires that no chartered bank is able to offer mortgage financing without insurance beyond a certain percentage of the value of the property. This limit is 80 percent for most residential single-family mortgages.

A high-ratio mortgage means your down payment is less than 20% of the property’s value and your mortgage exceeds 80 percent of the property value. With a high-ratio mortgage, you will have to buy mortgage insurance from the Canada Mortgage Housing Corporation (CMHC), Canada Guaranty or Genworth Financial to protect the lender against loss if you fail to make your mortgage payments.

The price of the insurance premium is added directly to the mortgage amount, going on top as an insurance premium vs. being deducted like a lender fee in trust company or private mortgages.

By insuring a mortgage loan, Canadian banks are able to reduce the capital allocation required on a per dollar basis as a result of reduced capital requirements due to the insurance component.

High-Ratio vs Conventional Mortgages?

When you buy a new home, you need at least 5% of the property’s value for the down payment. The type of mortgage you qualify for is based on the amount of your down payment.

Your choice of high-ratio or conventional will depend on how much money you have for a down payment.