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With
an offset mortgage, your main bank current account or savings accounts
(or both) are linked to your mortgage (and are usually, but not always,
held with the mortgage lender). Each month, the amount you owe on your
mortgage is reduced by the amount in these accounts before working out
the interest due on the loan.
For
example: If you have an interest-only mortgage of £100,000
and have savings in your ‘offset account’ of say
£25,000, you pay interest on £75,000.
If, in the next month you spend £5,000 and so only have
£20,000 in your ‘offset account’, you pay
interest on £80,000.
So, as your current account and savings balances go up, you pay less on
your mortgage. As they go down, you pay more.
They can also be tax-efficient if you pay tax on your savings. This is
because you do not earn any interest on your savings and so
don’t pay any tax on them. Instead you pay less interest on
your mortgage. This amount is usually greater than the interest you
would have earned after tax on your savings, if they were not offset
against your mortgage. This benefit is greater if you are a higher rate
taxpayer.
With
some lenders, the savings accounts of family members can be combined to
offset against one person’s mortgage. This could be useful
if, say, you want to help your child buy their first home.
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Offset Mortgages 
