Interest only loans have their place. An interest only loan allows you to either use less deposit or buy more property for the same repayment. If you have found a property where the rent will not quite cover the repayments, switching to an interest only loan might allow you to hold the property without costing you a cent each month.
Assuming the property value goes up over time, which is usually does in a built up area if you hold the property for a long enough time period, you can sell the property at the end of the loan term, pay off the loan and pocket the rest.
The only downside to an interest only loan is that the property might go down in value, which is why you have to plan on holding the property for the longer term. Most interest only loans also allow you to make extra payments to reduce the principle, so you can have all the benefits of a normal principle and interest loan with the option of lower repayments.
I wouldn't use an interest only loan for a house I was living in, but I wouldn't hesitate to use one for a rental property if it meant the property wasn't going to cost me money every month. This could mean that you could hold 2 rental properties instead of 1, and after 5 or 10 years, the increase in equity from holding 2 properties will always be more than the increase in equity from only holding one property and trying to pay down the loan. Say the properties are each worth $200k, and property prices double every 8-10 years on average. By holding 2 properties your equity goes up by $400k and it didn't cost you a cent after the initial purchase price. By holding 1 property your equity goes up by $200k plus any extra payments you make, and it cost you those extra payments.
Of course, if you can find a rental property where the rent covers the repayments for a normal principle and interest loan then you get the best of both worlds, but I know a LOT of people who have made serious money using interest only real estate loans.
I'm not saying they work in every circumstance, but I don't think all the facts are being considered here.
Summary: Comparing an interest only loan to a normal loan to buy a property, the normal loan will be the better choice most of the time. But if the reduced repayments of the interest only loan allows you to hold more properties than the normal loan, then the increase in equity as the properties go up in value can make the interest only loan(s) the better choice.
Disclaimer: I haven't read the original i-club thread so this post may have nothing to do with this conversation
