For investors seeking predictable returns and portfolio diversification, understanding the range of fixed income options is essential. Among these, Mortgage Investment Corporations (MICs) offer an alternative to more traditional vehicles like government and corporate bonds and Guaranteed Investment Certificates (GICs).
This article compares a MIC investment strategy with traditional fixed income options available in Canada. By examining their respective risk-return profiles, liquidity, tax considerations and diversification benefits, investors will gain a clear understanding of how each option fits different investment goals and risk appetites.
What Are MICs?
MICs are investment vehicles that pool capital from investors to lend primarily in the residential real estate market, often focusing on short-term (12 months, on average) or non-conventional mortgages that are not offered by traditional banks. In return, investors receive income generated from interest payments on these mortgages.
MICs pool capital from multiple investors, much like mutual funds, but instead of buying stocks or bonds, the pooled funds are used to provide mortgage loans. These loans are typically given to borrowers who do not qualify for traditional bank financing, need short-term bridge financing, or are involved in construction or development projects.
The income generated from monthly mortgage payments is passed back to investors, usually as monthly distributions. These distributions are taxed as interest income, unless held in a registered account like an RRSP or TFSA. MICs are required to pay out 100% of their net income to shareholders, often resulting in attractive yields compared to traditional fixed income instruments.
In today’s environment of interest rate fluctuations, inflation concerns, and tight credit conditions, investors are increasingly evaluating where their fixed income allocations can deliver both predictability and yield. A MIC investment strategy offers a way to diversify fixed-income exposure away from traditional credit markets, potentially earn higher yields, and access the real estate lending market without the risks of property ownership or title transfer.
Historically, MICs have offered higher yields than conventional fixed income vehicles like GICs and government bonds, largely due to the higher risk profile associated with private mortgage lending. MICs often lend at higher loan-to-value (LTV) ratios—typically up to 85%—compared to traditional banks. Higher LTVs increase the risk of loss, as there is less borrower equity to absorb potential declines in property value in the event of a default.
Additionally, MICs commonly lend to non-prime borrowers who may not qualify for traditional bank financing due to factors like self-employment, limited or impaired credit history, or unconventional income sources.
To compensate for these elevated risks, MIC investors can generally expect annual returns between 6% and 11%, depending on the fund’s investment strategy and risk profile.
In contrast, the 1-year GIC rate in Canada has averaged 2.50% – 3.00% over the past 20 years, depending on the interest rate environment, while 1-year Government of Canada bond yields have generally ranged between 0.50% – 4.0% over the same period, with occasional peaks and troughs corresponding to broader economic cycles..
Overview of Traditional Fixed Income Investments
Federal government bonds and treasuries are considered the safest fixed income investment in Canada and are widely used as benchmarks for interest rates. These instruments are backed by the federal government’s credit and offer steady, low-risk returns.
Treasuries differ from bonds primarily in term length, structure and purpose. Treasury bills (T-bills) have a maturity less than one year – typically 3, 6 or 12 months – are issued at a discount, and do not pay interest. Their return comes from the difference between the purchase price and the face value at maturity.
Provincial bonds, issued by provinces such as Ontario or British Columbia, typically offer slightly higher yields than federal bonds due to the greater credit risk associated with sub-national issuers.
Municipal bonds are issued by cities and local governments. While they may offer certain tax advantages, they are generally less liquid and have more varied credit quality depending on the issuing municipality.
Corporate bonds are available in two main categories: investment-grade and high-yield. Investment-grade bonds are issued by financially stable corporations and carry credit ratings of BBB or higher from agencies like Moody’s or S&P. These bonds offer moderate returns with relatively low default risk.
High-yield bonds, also known as junk bonds, are issued by companies with lower credit ratings. They offer higher returns to compensate for the greater risk of default and price volatility.
GICs are offered by various financial institutions, including banks, trust companies, credit unions and caisses populaires. They provide a guaranteed return of principal along with fixed interest payments over a specified term. GICs are insured up to $100,000 by the Canada Deposit Insurance Corporation (CDIC), making them one of the safest investment options. However, they are typically illiquid, especially for longer terms, unless specifically structured as cashable.
Comparing Risk and Return
Traditional fixed income investments in Canada serve as reliable tools for income generation and capital preservation, but each comes with trade-offs in terms of yield, risk, liquidity, and interest rate exposure. In contrast, a MIC investment strategy offers higher yield potential backed by real assets through exposure to Canada’s rapidly growing private mortgage market.
Yield potential is one of the most notable differences when comparing MICs with traditional fixed income securities. MICs generally offer higher annual returns, typically in the range of 6% to 11%, depending on the fund’s risk profile, lending strategy, and geographic focus.
In contrast, 1-year Government of Canada bonds have generally ranged between 0.50% – 4.0% over the same period, with occasional peaks and troughs corresponding to broader economic cycles. Provincial bonds have yielded slightly more due to higher credit risk. GICs are among the safest fixed-income options but offer the most modest returns. The 1-year GIC rate in Canada has averaged 2.5% – 3.0% over the past 20 years, depending on the interest rate environment.
MICs tend to be less directly affected by interest rate changes than traditional fixed income investments like bonds. This is because MIC returns are primarily driven by the interest income earned from the underlying pool of private mortgage loans, many of which are short-term and can be renewed or repriced more frequently based on market conditions As a result, MICs can more easily adjust to changing interest rate environments, which helps to preserve income stability.
By contrast, government bonds are highly sensitive to interest rate movements. When interest rates rise, the fixed coupon payments on existing bonds become less attractive relative to newly issued bonds, causing bond prices to fall, and vice versa. This inverse relationship means that bondholders may experience a decline in market value in a rising rate environment, particularly with longer duration bonds, which are more exposed – and therefore more sensitive – to rate changes.
GICs, on the other hand, are unaffected by interest rate movements once purchased, since they offer fixed returns for a defined term.
In terms of market volatility, MICs tend to exhibit stronger stability. Because most are privately held and not traded on public exchanges, they are not subject to daily market pricing and their values do not fluctuate. However, they do carry credit risks – particularly during economic downturns or softer real estate markets – and most MICs have a minimum 12-month holding period, which can limit short-term liquidity. However, unlike traditional fixed income vehicles, MICs are backed by real assets, providing an added layer of protection and potential downside mitigation.
Government bonds are more liquid but also more volatile, especially in response to rate changes or macroeconomic shifts. GICs are the most stable option, providing guaranteed principal and returns with no exposure to market pricing, though they come with limited liquidity unless issued in a redeemable format.
Liquidity & Accessibility
MICs are generally less liquid than traditional fixed income investments. Most MICs require a minimum holding period of 12 months or longer, and redemptions may be subject to advance notice. Because most MICs are privately offered and not traded on public exchanges, there’s no secondary market for investors to sell their shares quickly. Liquidity may also be influenced by the MIC’s cash flow and lending activity. For this reason, a MIC investment strategy is better suited for investors with a medium- to long-term horizon, typically 12 months or longer, who do not require short-term access to their capital.
Government bonds, particularly federal and provincial bonds, are considered highly liquid, especially in brokerage accounts. These bonds can be sold at any time in the secondary market, making them accessible and flexible for active investors. However, bond prices can fluctuate with interest rate movements, so selling before maturity may result in a gain or loss depending on market conditions.
GICs are usually illiquid unless purchased in a “cashable” or “redeemable” format. Standard GICs must be held to maturity to avoid penalties or forfeited interest, making them less flexible in terms of early access. However, they are widely accessible through banks, credit unions, caisses populaires and financial advisors, and often require only a modest minimum investment.
Regulatory and Tax Considerations
MICs are subject to different regulatory frameworks than traditional fixed income securities. In Canada, MICs are governed by Section 130.1 of the Income Tax Act, which defines their structure and tax treatment. To maintain their special tax status, they must meet specific criteria set out under this legislation.
MICs can be privately offered or publicly traded, but the majority are private. Publicly traded MICs are subject to stricter regulatory oversight than their private counterparts. They must comply with provincial securities regulations, including ongoing disclosure and financial reporting requirements, and are overseen by securities commissions such as the Ontario Securities Commission. If listed on a stock exchange like the TSX or TSX Venture Exchange, they must also meet additional listing requirements related to governance, transparency, and timely disclosure.
Private MICs in Canada are not listed on public exchanges and are exempt from many of the continuous disclosure and governance requirements that apply to publicly traded MICs. However, they are still subject to provincial securities laws and must comply with relevant exemptions, such as offering memorandum or accredited investor exemptions. Oversight may also involve periodic filings with provincial regulators. Investor protections may vary, making due diligence especially important when evaluating private MICs.
On the other hand, government bonds in Canada are regulated under securities laws administered by provincial and territorial securities commissions. These regulators oversee the issuance, trading, and disclosure requirements to ensure transparency and protect investors. Government bonds, issued by federal or provincial governments, are generally considered low risk and traded in regulated markets, with oversight to ensure fair and orderly trading. They are among the most secure, transparent investments available.
Corporate bonds in Canada are primarily traded in the over-the-counter (OTC) market, meaning transactions are negotiated directly between buyers and dealers rather than on a public exchange. While OTC markets are less transparent than public exchanges, corporate bond trading is still regulated.
GICs are offered by regulated financial institutions and are insured up to $100,000 per issuer by the CDIC, providing strong capital protection.
Like government bond interest and GIC interest, MIC income is fully taxable as interest income unless held within a registered account such as an RRSP or TFSA.
Diversification Benefits
MICs and traditional fixed income securities play distinct roles in a portfolio due to their differing correlation characteristics and impact on diversification.
A MIC investment strategy has a low correlation to traditional equity and bond markets because its returns are primarily driven by private real estate lending rather than broader market movements. This makes MICs a strong portfolio diversifier, especially in rising interest rate environments when traditional fixed income investments may face pressure.
Bonds are often negatively correlated with equities, providing stability and downside protection during market downturns. They’re a core tool for risk balancing in traditional asset allocation.
GICs have no market correlation, offering principal protection and guaranteed returns regardless of broader market fluctuations. Their stable, predictable income and low volatility help reduce overall portfolio risk. While their value does not fluctuate, limiting growth potential, GICs provide valuable diversification by balancing higher-risk investments and preserving capital.
Which Investor Profiles Fit Best?
MICs, bonds and GICs are all commonly used in Canadian investment portfolios, but they differ significantly in terms of yield potential, interest rate sensitivity and market volatility.
MICs suit investors with moderate to higher risk tolerance and a medium-to-long-term time horizon. They suit those seeking higher income and willing to accept less liquidity and more credit risk in exchange for better yield potential.
Government bonds are well-suited for conservative to moderate investors with investment horizons ranging from short to long term, depending on the bond’s duration. They offer stable, predictable income and portfolio protection, especially during economic downturns.
Corporate bonds offer a middle ground between government bonds and MICs in terms of risk and return. They suit investors with a medium-term investment horizon seeking regular income with moderate credit risk and who are comfortable with some market volatility.
GICs are appropriate for low-risk, capital-preserving investors with a short-to-medium-term horizon who prioritize security and guaranteed income over yield. They’re particularly suitable for retirees or risk-averse savers.
Conclusion
MICs and traditional fixed income securities play complementary roles in a diversified portfolio. When combined with bonds and GICs, a MIC can help create a balanced income approach that enhances yield while contributing to long-term portfolio stability and protection.
For over a decade, CMI Financial Group has helped investors integrate MIC strategies into their fixed income portfolios. With more than $3 billion in successful mortgage placements and over $1 billion dollars in assets under management, CMI is one of Canada’s leading non-bank financial institutions, offering CMI MIC Funds to investors looking to diversify into private mortgages.
To learn how CMI MIC Funds can enhance your fixed income strategy, contact us to arrange a free consultation with one of our experts.
