With an offset mortgage you can potentially reduce the amount of interest you pay by offsetting a credit balance against the mortgage debt. Some lenders facilitate this through a single account (usually known as a current account mortgage), others offer multiple accounts that allow customers to virtually separate their finances, but whichever the mechanism, the offsetting principle is the same.
Unspent income is offset against the amount of mortgage debt outstanding so you only pay interest on the net amount owed. For example, if the mortgage balance outstanding is £150,000, but you have a credit balance of say £10,000 in a current or savings account, interest is calculated on the net £140,000.
Normally a borrowing limit applies, and it is usual that a borrower can redraw against this limit as the mortgage is paid down. Although limits may be decreased over the term to lock in capital repayments, problems can still arise for undisciplined borrowers who choose to effectively 'withdraw' previously made mortgage payments.
However, with good management and discipline, an offset mortgage can result in significant interest savings and facilitate earlier repayment of the mortgage, but it is very important to ensure you are the right person for this type of mortgage.