After debating this issue for a few years, and having spoken to many investors some of whom are very successful investors, I conclude the following findings:

1. Investors who embrace the concept of interest only loan have an exit strategy in mind. They know what they are doing and is fully aware of the risks, and rewards involved.

2. The so-called ‘risk adverse’ investor who pays down on the loan rarely goes beyond one investment property.

In simple terms, the advantages of interest only loan are as follows:

1. It maximizes ‘cash flow’ for the investor. Depending on the term of the loan, the investor services the interest only leaving the principal of the loan untouched. This means lower repayment and better cash flow for the investor.

2. The interest component accrued by the investor is tax deductible. Together with the depreciation allowance of the building and fittings, it allows the investor to build up ‘tax credits’ for purpose of offsetting capital gains tax should the investor sell his assets in future.

The risk of an investor is the holding cost – rental income less all outgoings including interest costs. If an investor manages his holding costs carefully, with buffer for the downside, he should be able to build a very effective portfolio.

So to pay down or not to pay down? It is really down to individual investors….if they have an overall strategy; taking into account cashflow and tax benefits etc…