Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
Investing for a loft conversion
Rising property prices mean many people prefer to increase space by getting a loft conversion, rather than move home. Loft conversions are by no means cheap, but investing a relatively small amount of money each month could help you to raise the necessary funds sooner than you might think.
The most common ways of footing a loft conversion bill are to apply for an increased mortgage or get a personal loan. These actions increase the amount of debt you’ll have to pay off and you could face large mortgage arrangement fees.
By planning ahead and investing, you’ll avoid having to pay extra money to a lender and you can grow your money, helping you to reach your required amount more quickly.
The average cost of a loft conversion with a dormer and en-suite is £40,000. If you invested £400 a month and achieved an annual return of 5% you could get to this figure within seven years.
Picking the right investments
Seven years is the absolute minimum amount of time required to sensibly invest in equities, claim market experts. Any shorter and you might not have enough time to recover from any stock market downturn.
Ryan Hughes, head of fund selection at AJ Bell Youinvest, says regardless of your overall objective, it is important to think carefully about your attitude to risk and only invest in a manner in which you’re comfortable.
‘With a focus on longer term investing, and assuming that investors have some tolerance for risk, then equity exposure would be appropriate, particularly given the return requirement of 5% per year,’ he says.
Hughes says a well-diversified and balanced approach to investing across different asset classes could deliver the required return.
Assuming a medium risk profile, he suggests having a 50% allocation to equities with 40% in corporate bonds and the remainder in property.
If you like the passive investment route you could look at BlackRock UK Equity Tracker (GB00B7C44X99), which tracks the performance of the FTSE-All Share. Its five-year annualised return is 9.2%.
For the bond option an example is iShares Corporate Bond ETF (SLXX), which tracks an index comprised of sterling-denominated investment grade corporate bonds.
If you prefer active solutions, Hughes recommends core holdings like Majedie UK Equity (GB00B88NK732), Threadneedle UK Equity Income (GB00B888FR33), Artemis US Select (GB00BMMV5105), Fidelity Asia (GB00B6Y7NF43) and Baillie Gifford High Yield Bond (GB00B1W0GF10). He says these funds would create a well-diversified portfolio and are led by managers with a proven track record of long-term outperformance.
Your loft conversion portfolio could be earmarked as a separate ‘pot’ from the rest of your investments.
Hughes says if you have specific time horizons for certain savings objectives, this can allow a slightly different investment strategy to be followed. For example, the longer the time horizon, the more risk that can be taken.
‘There is no problem in investing for a specific purpose but it should at least fit with your overall financial plan,’ he adds.
Moving into lower risk assets
When you’re investing for a specific purpose and over a defined time period it’s important to move gradually into a lower risk portfolio as you near your cut-off date.
Charles Calkin, a financial planner at James Hambro, points out that equities can tumble 20% or more in really bad years, which means you’re not guaranteed to have the money you desire at the point you need it.
‘You might shift towards a balanced multi-asset fund that blends equities with other less risky assets.
‘But the trouble with lowering the risk to compensate for equity volatility is that you can get lower returns too and may fall short of your target and find yourself having to save for longer,’ he adds.
Some financial advisers reckon a 40% equity exposure would be sufficient, especially given the desired seven-year timeframe.
Colin Low, managing director at Kingsfleet Wealth, suggests opting for a cautious multi-asset fund like Vanguard LifeStrategy 40% Equity (GB00B3ZHN960). It has a five-year annualised return
Although seven years is a relatively short investment timeframe, Joshua Gerstler, financial adviser at The Orchard Practice, says it’s still important to regularly review your portfolio and financial situation.
‘A lot can change in seven years so I would always suggest regular reviews of your finances which include all your objectives, not just your loft conversion, as your circumstances may change. Your plan may need to be updated to ensure it is always working towards what you want to achieve,’ he explains.
There are other issues to consider. Calkin points out that we are in a rising inflationary environment, which means a loft conversion that costs £40,000 now could cost more in seven years’ time.
You may wish to invest a bit more each month or invest for slightly longer in order to manage any inflationary pressures along the journey.
If you invested £450 a month, you could get to £45,000 after seven years (assuming the same 5% annual return); £400 over eight years would give you £47,000; while £450 over eight years would be worth £53,000.
‘Most of us want a loft conversion for a reason and often that is a growing family. If you’re not careful you may find by the time you can afford to get the loft converted the kids will have flown the nest. Or you might have all strangled each other because of being over-cramped in your house,’ he warns.