In the case of an offset mortgage, your main bank current account and / or savings accounts are linked to your mortgage. 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 instance, if you have an interest-only mortgage of $ 100,000 and have savings in your offset account of $ 25,000, you will pay interest only on $ 75,000. As a consequence, when your current account and savings balances go up, you pay less on your mortgage. As they go down, you pay more.
This type of mortgage 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 do not pay any tax on them. Instead you pay less interest on your mortgage. Finally, depending on your lender, 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.
Second, a current account mortgage is almost identical to an offset mortgage in that it offsets the balance of your savings against your mortgage. However in this case, both accounts are usually combined into one account.
The mortgage lender will plan with you the minimum amount you should leave in your account each month to pay back your mortgage according to the agreed mortgage term. If you leave more than this in your account then you pay less interest and may pay your mortgage off early but if you leave less in your account each month, you will end up paying more for your mortgage.
Should you choose current account or offset mortgages? Probably yes, if you are a higher rate taxpayer and have substantial savings to offset. The answer is negative if you do not have much left in savings after paying your deposit and other mortgages may be cheaper for you.