An offset mortgage means that other accounts you may have are all added together on a daily basis when calculating your total debt. You can normally add in all your current accounts and savings accounts you have to combine all of the monies you have at any one time to calculate your total debt. So long at the headline interest rate for an offset product is competitive then offsetting could be a great way to reduce the total term of your mortgage.
The great part is you should be able to knock a few years off the total term of your mortgage purely because your salary is added into your accounts and the calculations made for interest purposes. Because you are paying a fixed monthly payment against your mortgage and the balance is slightly less because you have additional income set against it then the interest added is also slightly less.
So, for example, if your mortage is £100,000 and you are paying in a salary of £2,500 each month for those days you have a balance in your current account of £2,500 or more the mortgage is only accuring interest on an outstanding debt of £97,500. As this will happen each month the amount of interest is less than you would have paid on the full debt but you are still paying back the same fixed amount. Over time your loan will be paid off much faster.
The market has certainly matured over the years since these types of mortgages were introduced. Now with some lenders you'll be able to have fixed rate, tracker rates and variable rate offset mortgages so the choice is almost completely up to you. When they were first introduced into the UK the interest rate was a lot higher than standard mortgages and were therefore not very competitive but today the interest rates are on a par with standard mortgage products so it makes a lot of sense to investigate whether these are right for you as they can save you a lot of money in interest and get your loan paid off many years before you thought it would do. You may also be able to get a buy to let offset mortgage but these deals are far and few.
Apart from the ability to pay your loan off early and benefit from great interest rates most lenders also allow you to overpay some of your loan when you may have a little extra. Of course you don't actually have to over pay because so long as you have the additional monies in a savings account that's linked to your mortgage account these monies will be taken into acccount when calculating the daily interest.
Most new products on the market may have an application fee which can amount to over £1,000 so you'll need to compare products on the market to take account of all of the costs involved. And if you take a product that is either fixed or capped for several years you may have to pay quite high penalties if you want to switch to another product before the term of the mortgage has completed.
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