An offset mortgage pairs your home loan with an account you keep money in. Your savings earn no interest; instead, the lender subtracts their balance from the loan before working out what you owe. Australians mostly speak of an offset account, and Moneysmart describes how it runs: interest on most home loans is calculated daily, and each day the offset balance is taken off the loan balance first.
The saving is simple to estimate. Owe £200,000 at 4.5% with £20,000 sitting in the linked account, and you are charged interest as if the loan were £180,000. Over a year that is about £900 less interest, the same as £20,000 earning 4.5%, and in Britain it has the extra merit that money not earning interest has no interest to tax. Your monthly payment usually stays the same, so the saving goes to principal and the loan ends earlier.
It is not the same as paying the loan down. An overpayment reduces the debt for good, while money in an offset account stays yours to spend and the saving stops the day you withdraw it. That flexibility has a price: Moneysmart notes that some banks charge for offset features through a higher interest rate, account fees or both, so compare the rate with an ordinary loan before you assume it pays. It suits people who keep a sizeable cash buffer and would not otherwise put it towards the mortgage.
The mortgage calculator does not model an offset account. For a rough sense of the interest at stake, enter a loan smaller by the balance you expect to keep and compare its total interest with the full loan's. An offset that leaves your payment unchanged saves a little more than that, because it also shortens the term.