What is wrong with using part of mortgage to invest?

Hi,

I need some 'Investment Advise for Dummies' please?
Here's the scenario. My mortgage is up for renewal in September. I will be coming out of a three year fixed mortgage then. I wept when I remembered the rate I got 3 years ago and yet happy that I had the foresight to fix it then. In that time I have gotten engaged and my fiance works for a bank. Needless to say it is pretty much a no brainer to go with the rate my partner can get with the bank.

My question is this. We can meet the repayments on our current mortgage comfortably, and if we renew just the current value of the mortgage with my fiance's bank we will be able to meet them more than comfortably. Given that we have some lee-way we are thinking of perhaps increasing the mortgage. We would have two options available to us.
1. We could increase the current mortgage value and invest in the property by converting the attic
2. We could increase a bit more and convert the attic and invest the remainder

The first option I am not overly worried about as it is a capital investment and although times are uncertain I do feel that it could put another 50k on the value of the house.
But it is really the uncertainty of the second option I am more unsure about.
The new mortgage we would be getting would be fixed for the length of time my partner stays with the bank and for the lifetime of the mortgage, this is a massive plus. Which would mean that although interest rates are going to increase our mortgage repayments would remain the same. However if we invested some of it the increase in interest rates would only serve to benefit the investment ... surely???
I do know that the initial loan would be over a greater length of time than the investment, but the hope (and I know investments are a bit like gambling) the hope is that we would make a decent return in say five years.

My confusion lies in the fact that I honestly don't understand why everyone says you should never do this. The LTV on our home at the moment is less than 40%. We can comfortably manage the repayments that an increase in the mortgage will bring but we will have more living space and monies invested.
Can someone please tell me in plain language why I should not do this?

Thanks in advance for your patience!

There is nothing wrong with borrowing to invest if you can handle the downside. You can borrow cheaply. Now looks like a good time to invest in equities. You should be able to do better than 5% per annum on the stockmarket for the next few years.

You already own a property, so buying another property is concentrating your assets.

You probably should not convert the attic for investment purposes. Convert it if you need or might need the accommodation.

Which would mean that although interest rates are going to increase...

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You make a few mistakes in the detail of your proposals. Interest rates may rise or fall over the term of your investment. No one knows.

You probably should not fix, especially if you are borrowing. You need flexibility to change your strategy if your circumstances change. If you are tied into a fixed rate, you may have to pay a penalty to get out of it.

Brendan

Would you not at this stage in your life be better off just increasing your monthly repayments and decreasing what you owe. Your circumstances will change when you marry and maybe have children , so maybe it would be better to owe less and have a good nest egg in deposit savings.

Thanks a million to those who replied. Still undecided as to what we might do, but liked what Brendan has to say... more food for thought... )

Dont forget that even though you have a fixed staff rate basically for the mortgage you will have to pay benefit in kind. So while increasing rates would benefit an investment the minister will be quick to increase the deemed interest rate for the purposes of benefit in kind as well so the return is not as great as anticipated and the BIK should be factored in.

Gilliebean said:

Which would mean that although interest rates are going to increase our mortgage repayments would remain the same.

However if we invested some of it the increase in interest rates would only serve to benefit the investment ... surely???

My confusion lies in the fact that I honestly don't understand why everyone says you should never do this.

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Despite alot of inflation related rhetoric, most economists are predicting modest interest rate rises, possibly followed by cuts as economic growth declines and inflation fears decline.

Very few investments benefit from increases in interest rates, stocks dont, bonds dont, property doesnt. You seem to be taking a view that floating rates will stay higher than fixed for some time so entering an interest rate swap (pay fixed, recieve floating) would be the best way to benefit from this. If you dont have the financial expertise to thoroughly understand an interest rate swap after reading up on them, then I would suggest that you should abandon the borrow to invest idea entirely.

Its not that everyone says you shouldnt do it, some advisers recommend it for people in certain circumstamces, its more that you need to fully understand the risks you are exposing yourself to.

And another thing. Borrowing to invest is tax inefficient. You will not get tax relief on the interest paid and you will pay tax on any income/gains on the investment.

Again thank you to all who have posted in response to this thread. I think for the moment we will stick with just changing mortgage provider to the one I mention in the original post and try increase our repayments... less debt in the long term is perhaps the best option...

Again thank you!