You should look at the switch as having 2 terminals for the batteries and 1 INPUT from the alt, not an output. BATT 1 = "Starting" battery, BATT 2 = "House" battery, and C (common) is the charge from the alt. with your loads wired directly to the battery.
If wired correctly with the load pulling directly off the "House" battery, you can leave the switch in BATT 1 position, and it will be isolated. The only reason the move the switch is to recharge the battery after starting the engine. $.02
When 2 batteries of unequal charge are connected in parallel, they simply equalize.