An offset mortgage keeps your mortgage, savings and current accounts in separate "pots". As with Current Account style Mortgages, your savings are used to offset/ reduce your mortgage.

As an example if you have a mortgage of £150,000 and savings of £15,000, then you only pay interest on the £135,000 difference.

Again you make a standard payment every month, but your savings act as a permanent overpayment, wiping out more of the capital every month, which helps clear the mortgage early.

There are also tax advantages with an offset mortgage.  Continuing with our example above: the interest you would have earned on the £15,000 in a savings account would be taxed.  After tax you would be looking at less net benefit than the sum you would save on mortgage interest in an offset mortgage account.  It is generally considered better to pay less interest on the mortgage than earn interest on your savings. For this reason, offset mortgages can be particularly good value for higher rate tax payers.

However, these mortgages are not for the financially disorganised.  You need to be on the ball with organising your monthly incomes and expenditures. You also need to have a reasonable amount of money coming in every month or a decent amount of savings to make the most of the offset mortgage features.

Pros: You are effectively overpaying your mortgage every month, thus enabling you to clear it more quickly. Your savings and debts are kept separate and this makes it easier to keep track of your money. An offset mortgage is tax efficient, especially for higher rate taxpayers.

Cons: As with Current Account Mortgages, the interest rate is higher than other more standard types of mortgage. So you need to have reasonably substantial savings (approximately 10%>) to make the sums add up. If you need to spend your savings, then your mortgage will become more expensive.