Private investors have become significant players in Canada’s mortgage market, accounting for an ever-increasing share of mortgage financing. Once limited to high-net-worth investors, private mortgages have become more accessible to mainstream investment audiences thanks to the growth and development of Mortgage Investment Corporations (MICs). Although MICs have attracted considerable attention in recent years, MIC fund managers are the unsung heroes of this growing industry, as their expertise is vital in driving success for mortgage corporations, their investors and individual borrowers.
Through a series of curated questions, this article will provide an inside look at how our MIC fund managers, Julian and Juliano, distinguish themselves as experts in mortgage management and reveal the value they bring to Canada’s MIC sector.
Understanding Mortgage Investment Corporations
What are Mortgage Investment Corporations (MICs)?
A MIC is a corporation that invests in a pool of mortgages on behalf of investors. It functions as both a lending company and an investment fund, overseeing the entire mortgage process on behalf of investors. This includes sourcing, adjudication, selection, administration, due diligence, and risk management. Investors who deposit money into a MIC become preferred shareholders, entitling them to income payments derived from interest and fees collected from mortgage borrowers.
What role do MICs play in Canada’s financial system?
MICs may sound like a novel asset class, but they were first introduced in 1973 under the Mortgage Financing Act to attract private capital to the residential mortgage sector to ensure financing could keep pace with Canada’s rapid population growth.
MICs support Canada’s dynamic mortgage market by providing borrowers with alternative financing options, without the stringent regulatory requirements imposed on the major banks. MICs are an integral part of Canada’s financial system and are governed under the Income Tax Act. They can only invest in mortgages secured by Canadian real estate and must invest at least 50% of their assets in residential properties. All MICs must have at least 20 shareholders, with no single shareholder controlling more than 25% of the fund. All income earned through a MIC flows directly to shareholders in the form of dividends, which are taxed in their hands as interest income.
What is the minimum investment required to participate in MIC funds?
One of the primary benefits of MIC investing is the low barrier to entry into the market. By purchasing shares in a MIC, investors can enter the private debt market at a fraction of the up-front investment required for a whole mortgage investment program. In the case of CMI MIC Funds, a minimum investment of $5,000 is required. This is much lower than the CMI Mortgage Investments program, where investors fund entire mortgage transactions, which requires a minimum investment of $500,000 – $1,000,000.
The Appeal of MIC Investing
What are the primary advantages of MIC investing?
MICs appeal to investors because they offer high yields, low barriers to entry, and diversification. As a result, they are generally less risky than investing in individual mortgages. MICs grew in popularity in the decade following the 2008 financial crisis, where traditional fixed-income securities like government bonds and Guaranteed Investment Certificates (GICs) offered extremely low yields.
MICs, on the other hand, provided much higher rates of return to investors without significantly increasing their risk exposure. This is in large part because a MIC’s underlying mortgage investments are backed by real estate. Amid the recent shifts in monetary policy and macroeconomic conditions, MICs continue to provide returns that are non-correlated with public markets, so investors enjoy attractive returns without the volatility.
What rate of return can a MIC investor expect to earn?
MICs are one of the fastest-growing alternative assets because they provide regular cash flow, typically monthly. Historically, MICs have generated annual returns that exceed traditional fixed-income securities. Returns vary based on the provider and the risk profile of the fund. CMI MIC Funds target a net annual yield of between 7% and 11%, with the funds reaching their targets every year since inception. Leading MIC funds, like CMI’s, offer a dividend reinvestment program (DRIP), which allows investors to reinvest their monthly dividends in additional MIC shares automatically for compound growth.
MIC Investment Strategy
Are MIC funds suited for short-term investment strategies?
As income-producing assets, MICs are often employed as part of a longer-term investment strategy. Investors seeking defensive allocations or capital preservation prefer the relative stability and regular yields MICs offer. Although MICs typically do not have maximum durations, MICs generally do set minimum terms. As a result, MICs are not suited to short-term investment horizons.
Managing Risk in MICs
How do MICs manage risk and perform due diligence?
Like any well-managed investment fund, MICs perform comprehensive and ongoing risk assessment of their mortgage portfolios. This includes an extensive due diligence process for each mortgage selected for inclusion in the portfolio. Before lending out investor capital to a borrower, mortgages must be approved and processed by the MIC’s credit, underwriting, and fulfillment teams. Factors such as loan-to-value ratio, security position, condition and location of the underlying property, the borrower’s Beacon score, and other eligibility factors are carefully reviewed by underwriting teams before the mortgage’s appropriate allocation is determined. These factors are then weighed against the mortgage’s relative standing within the MIC portfolio.
At CMI, every mortgage is subject to stringent administrative oversight, supported by industry-leading software to support, automate and optimize critical administration processes, from repayment and default management–including direct payment processing and recouping missed or returned payments–to mortgage monitoring, renewal and discharge. This includes assessing the renewal potential of each mortgage and ensuring all borrower fees have been paid, and any outstanding expenses and/or interest is fully recouped, before a mortgage is discharged.
How does the prevailing economic climate impact the performance of MICs?
While MICs are not completely immune to economic influences, they typically exhibit negligible volatility. That’s because MICs invest in a relatively stable market – Canadian mortgages – that is not correlated with public equity and fixed income markets. Also, Canadian homeowners have a strong track record of paying their mortgages, with extremely low delinquency rates, even during the pandemic.
At CMI, all mortgages have a fixed rate, so there is no change in rate during the term, which is 12 months on average. Interest rate fluctuations in the market during the life of the mortgage have no impact. At the end of the term, if a borrower wants to renew, we assess current market conditions, the property and the borrower’s repayment history to determine any renewal offers and the associated rate and fees. If there are concerns about the viability of the mortgage, either because of affordability concerns, the marketability or value of the property, or other market factors, we don’t renew.
As a result, economic conditions do not have a material impact on MIC performance.
MICs Versus Direct Real Estate Investment
How does a MIC investment differ from a property investment?
Before learning about MICs, many investors believed that the only way to gain exposure to the real estate market was through physical ownership of property. While direct ownership continues to offer benefits, it may not be optimal, particularly in today’s investment climate.
MICs invest in private mortgages, which are backed by real estate, rather than investing directly in physical properties. In this sense, MICs offer many of the same benefits as owning real estate, but without the hassle of title transfer, tenant management and property upkeep, and without the risks of negative cash flow, vacancies, liquidity constraints, and fluctuating market values associated with the property.
Tax Considerations
What tax considerations should MIC investors keep in mind?
Prospective MIC investors should seek professional advice on how to manage their tax situation. However, investors must consider that although MICs are generally exempt from paying income tax, shareholders (i.e., the individual investor) must pay tax on their interest income (dividends) if it is earned outside of a tax-deferred account.
Are MIC investments eligible for registered accounts?
Investors can optimize their MIC holdings for tax purposes by investing through a registered account, such as an RRSP, TFSA, or RESP. In the case of an RRSP, earnings are tax-deferred until the investor begins making withdrawals, which is usually at retirement. With a TFSA, returns can be withdrawn at any time without any tax penalties, so long as the investments were made within the investor’s contribution limit.
Geographic Diversification
What are the benefits of geographic diversification?
MICs are known for providing highly diverse mortgage portfolios. For some MICs, that includes geographic diversification, or the process of investing in mortgages across multiple markets. This practice of geographic diversification mitigates the risk of over-concentration in one area of the country, especially in larger cities, where private mortgage lending is most prevalent and where return expectations have declined due to growing competition.
Do CMI MIC Funds have any specific geographical focus or limitations?
There is a concentration of MICs in Ontario and British Columbia. Nearly half of all MICs are located in these two provinces. Unlike these regional operators, CMI lends from coast-to-coast across Canada and has made geographic diversification an anchor of its investment strategy to reduce the risks of uneven demand for residential loans and to maximize yields across smaller mortgage markets. CMI MIC Funds have a primary focus on large and small markets across Ontario, Alberta, British Columbia, and the Atlantic provinces. Our vast national community of more than 12,000 broker partners source high quality mortgage opportunities across Canada.
The Unique Position of CMI MIC Funds
What sets CMI MIC Funds apart in the Canadian MIC landscape?
Not all private lenders are created equal. CMI has been a leader in Canada’s private mortgage market for more than a decade, having facilitated more than $2.5 billion in successful mortgage placements.
Our CMI MIC Funds provide barrier-free entry into Canada’s residential mortgage market via three distinct mortgage portfolios that are designed for specific investor risk/return profiles:
- CMI MIC Prime Mortgage Fund employs a more conservative investment strategy, focusing primarily on first mortgages and targeting a net annual yield of 7% to 8%.
- CMI MIC Balanced Mortgage Fund invests in a diversified pool of first and second mortgages, targeting a net annual yield of between 8% and 9%.
- CMI MIC High-Yield Opportunity Fund invests in slightly higher risk and higher yield second mortgages, targeting a net annual yield of 10% to 11%.
Our in-house team at CMI Mortgage Services provides comprehensive in-house administration for every CMI mortgage. Our CMI MIC Funds have more than $282 million in assets under management, as of Q1 2024.
Conclusion
MIC investments provide a seamless entry into Canada’s highly lucrative private mortgage market, offering unparalleled diversification benefits – and real estate backing – for those seeking a defensive, diversified and passive income strategy. CMI Financial Group is Canada’s leader in providing accessible MIC funds. With more than $2.5 billion in successful mortgage placements, we specialize in delivering high-quality mortgage investment solutions. To learn more about our programs and to get started with CMI MIC Funds, contact us for a free consultation.
