Mortgage fund investing in Canada: A guide for investors

More and more investors are looking into mortgage investment funds. This is particularly true because the housing industry is one of the main drivers of Canada’s economy and has outperformed many other investment classes.

Whether you are a new investor or have been shopping around for alternative investments to add to your portfolio, investing in mortgage funds provides passive income and security in real estate. This is true even if one may lack specific real estate expertise.

Mortgage funds 101

Mortgage funds encompass a broad range of investments and there are many types of mortgage fund investments that can apply to you. There are plenty of ways you can invest in mortgage funds. These are typically a lower-risk investment compared to equities. Especially since we’ve seen record highs in the stock market since the great recession.

When you are unsure of where to invest in mortgage funds, this is where mortgage investment corporation or MICs come in. Interest in MICs is on the rise as investors, both individual and large corporations, are craving income assets that offer security and outperform many other vehicles in their class.

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How MICs Work

Simply put, with MICs investors participate in a large pool of real estate under the umbrella of an investment fund that is operated by an experienced management team who supervises the complex sourcing, reviewal of mortgage loans, and determines the risk/reward ratio on your behalf. MICs provide an attractive targeted annual return typically in the range of 6 to 10 percent.

One-hundred percent of the MICs regular distributions can pass through to any registered plans such as RRSPs, TFSAs, RDSPs, RRIFs, and RESPs. The investor can choose to reinvest the distribution and take advantage of compounding rates of return. Therefore, it is continuous and has an excellent chance to grow the overall return on a tax-exempt basis until the funds are fully withdrawn.

Most importantly, the MIC allows investors to access and participate in the lucrative mortgage industry, without having to manage the paperwork and Interest Payments. Essentially, you become the bank.

Different Types of Mortgage Funds

It is important to evaluate the different forms of mortgage funds available on the market and decide which is suitable for you as an investor. A mortgage fund is not a one-size-fits-all kind of investment vehicle. Here are some of the more common ones:

  • Mortgage funds
  • MICs
  • Syndicated mortgages
  • Individual mortgages

Mortgage Funds

This is a type of investment where investors buy units in a fund that is managed by a professional fund manager. The money is then given to borrowers as mortgage loans where they can use the money to buy or develop properties.

MICs

As previously mentioned MICs are a popular choice among the types of mortgage fund investments providing a stream of cash flow distributed back to its investors and secured by strong underlying assets.

Syndicated Mortgages

This mortgage investment comprises of a group of investors who finance an individual loan. A claim is registered on property and investors buy shares of that charge. Syndicate mortgages can potentially earn more than MICs, however the risks are higher and investors can have more direct access to engage in the loan and property. Usually, the investors hold direct ownership of the mortgage than the fund manager or administrator.

Individual Mortgages

Investors can provide individual mortgages directly to borrowers in exchange for security against the asset they are mortgaging. Much like a bank would, it is vital to evaluate the borrower and assess the risk and adjust the terms and interest rates.

It is impossible to paint all mortgage investment companies with the same brush with each one having their own policies, strengths, and strategies.

Investors can participate in a MIC without having any obligation for management, thus is an excellent source of passive income. Apart from that, investing in a MIC offers an additional layer of security through ongoing regulation and oversight from several governing bodies. The Canadian Revenue Agency or CRA maintains oversight on the tax-status of MICs, as well as the Securities Commission and the Financial Institution Commission of Canada or FICOM. To assign shares or securities, MICs must go through a costly and challenging regulatory process.

Be mindful of the underlying assets controlled by the mortgage fund. As Matthew Ardrey, the Vice-President and financial planner at TriDelta Financial in Toronto said, that Location, location, location also applies to mortgage pooled funds. Consider MICs with properties situated in prime locations to ensure a well-balanced portfolio has a stable footing in sound markets backed by strong economic fundamentals.

What to look for

Like with any other investment, one must conduct proper due diligence when reviewing any mortgage fund. While studying a MIC, investors must be familiar with some key factors possessed by leading MICs in Canada.

For instance, the key to the success of MICs is the management experience, their asset type, and of course, location. Investors should ask about the fund’s priority, portfolio mix, loan-to-value (LTV) ratios, geographical concentrations, and the types of mortgages they offer too. Look for MICs with a stable history of performance, extensive experience of the managers, and how they diversify mortgage investments to protect investors.

In general, MICs can be a great diversification and passive income play for investors. To learn more, you can check out our resources here, or contact us using the form directly below this article.