As the name suggests, an offset mortgage works by using the money you have to reduce the amount you owe.
You don’t earn any interest and can get your cash back whenever you want it, but as long as you leave it in the offset account, you don’t pay any interest on an equal amount of your mortgage balance.
And, because debit interest tends to be quite a bit more than credit interest, this means you save.
But there’s more than one way of doing this.
The Current Account Mortgage
This is the most extreme form of offset, with your mortgage account taking the place of all your other accounts.
Your salary gets paid in every month, reducing what you owe, and you use the account just as you would traditional current and savings accounts paying bills, putting money in and taking it out as you need to.
The more you pay in, the less you owe and the less the monthly interest bill.
For more on this, read Current account mortgages.
The Ordinary Offset Mortgage
This is the non-current account version, which replaces only your savings accounts.
You keep your current account running as normal, but you move all your savings balances and any cash you have spare at the end of each month into an offset account provided by your lender.
This is linked to your mortgage but not actually part of it.
So, although you will have separate savings and mortgage accounts, one showing a positive balance and the other negative, the savings are offset against the debt as above, reducing your monthly interest.
For more on the other aspects of offset mortgages, visit The features of an offset mortgage.
To find out if offsetting could be right for you, read Who should have an offset mortgage?