In the world of alternative investments, Mortgage Investment Corporations (MICs) are among the most widely misunderstood assets. This article sheds light on the most common misconceptions surrounding MICs so that investors can have a more accurate understanding of private mortgage investments. By the end of the article, you should have a better appreciation of how MICs operate, who they serve, and whether you should consider them for your portfolio.
What Is a MIC?
A type of alternative investment, a Mortgage Investment Corporation is a pooled investment portfolio that invests primarily in first and second mortgages. In practice, MICs operate like mutual funds or exchange-traded funds but are composed of mortgages instead of stocks and bonds. In Canada, MICs are regulated financial products that are governed by the Income Tax Act.
In addition to being an investment fund, a MIC acts as a lending corporation that manages the entire mortgage investment process on behalf of investors. Mortgage selection, adjudication, due diligence, administration, and risk management are handled entirely by the mortgage corporation’s staff. MIC shareholders are passive investors in the fund and receive regular dividend payments in the form of fees and interest collected from mortgage borrowers.
Myth vs. Reality: Understanding MIC Operations
Perhaps the most common misconception is MICs invest in real estate. This simply is not true.
While MICs have exposure to the real estate market, they invest in mortgages, not real estate. A MIC is not a real estate investment trust and doesn’t offer fractional shares in residential properties. When you invest in a MIC, your funds are pooled with capital from other investors and placed in residential mortgages (usually first and second mortgages), which are backed by the underlying properties. Although real estate and mortgage investing each have their benefits, mortgages are arguably more advantageous because the investor doesn’t assume any of the risks of homeownership or title transfer. They don’t have to worry about overhead costs, liquidity issues, tenant or property management, vacancies, or potential negative cash flow.
Another common misconception is that MICs are unregulated — a myth borne out of popular news stories associating them with “shadow banks.” MICs are not “shadow banks.” They are non-bank lenders that provide alternative mortgage solutions to the ones offered by major banks. According to Statistics Canada, millions of Canadians have obtained loans from alternative lenders, including MICs.
MICs were first introduced in Canada in 1973 under the federal Residential Mortgage Financing Act. Today, they are governed by the Income Tax Act and classified as flow-through entities, which means they pay zero tax as long as 100% of the income is distributed to shareholders. Once in the hands of shareholders, MIC dividends are treated as interest income and subject to tax regulations.
As CMI’s chief executive officer Bryan Jaskolka notes, much of the trepidation associated with MICs goes out the window when you consider how long the investment vehicle has been around.
“A MIC is not a new vehicle, and it’s a simple one to explain,” he told Canada’s Wealth Professional publication. “It’s a fixed income investment that pays monthly to the investor and the underlying portfolio assets are mortgage investments tied to people’s homes. I think that when they really break down what we’re doing, it’s a pretty simple formula that’s built to last.
There’s also the belief that MICs are inherently risky because they lend to borrowers with a higher risk profile.
Although private mortgages have a slightly higher delinquency rate than conventional mortgages offered by the major banks, this risk can be mitigated through the MIC’s due diligence processes. Remember: MICs are comprised of a highly diversified pool of mortgages. This diversification includes several criteria, including loan-to-value, security position, property type, borrower type, and geography. And like other investment funds, some MICs are more conservative and focus on capital preservation strategies that offer lower yields in exchange for slightly less volatility.
In the case of CMI MIC Funds, all mortgage portfolios are designed to satisfy the core tenants of diversification. These strategies allow CMI MIC Funds to generate 7-11% annual returns for our investors, depending on the fund.
Another common misconception is that it’s hard to invest in MICs because they’re alternative investments. This is not true anymore. Private mortgages used to be the sole domain of accredited investors and high-net-worth individuals, but MICs have made private mortgages accessible to a much wider range of investors. In the case of CMI MIC Funds, investors have several MICs to choose from based on their investment objectives and risk tolerance, and the minimum investment is significantly lower than a whole mortgage investment. MICs are also registered account eligible investments, which means they can be incorporated into your RRSP, RRIF, RESP, or TFSA.
By clarifying these misconceptions, investors should be able to see the value proposition MICs offer more clearly. As a portfolio diversification tool, MICs have historically outperformed traditional fixed-income assets without assuming unnecessary risk, making them a compelling alternative investment.
The Future of MICs in Canada
Mortgage Investment Corporations have carved out a strong presence in Canada by providing alternative, flexible mortgage options to a growing population. Even during the housing market slowdown of 2023, the top MICs reported impressive growth — a clear sign that borrowers were looking beyond the major banks for their funding needs.
According to the Canada Mortgage and Housing Corporation (CMHC), the country’s top MICs saw their assets under management (AUM) grow by 7.1% year-over-year in the first quarter of 2023. AUM had grown by double digits in each of the previous five quarters.
Meanwhile, data from Statistics Canada showed that the total value of outstanding loans from non-bank lenders, which includes MICs, grew to $388.6 billion in the second quarter of 2023. That’s an annual jump of 4%.
In addition to their flexibility, demand for private mortgages is likely to continue to grow due to more stringent lending requirements at traditional banks.
“Due to more difficulty in qualifying, many folks have to take a private mortgage,” David Steinfeld, who heads Stonefield Mortgage, told The Globe and Mail.
Investing in MICs Has Never Been Easier
CMI Financial Group is one of Canada’s fastest growing non-bank financial services providers. For nearly a decade, we’ve helped thousands of investors access the private mortgage market through our industry-leading mortgage investment solutions. CMI MIC Funds provide a seamless entry into the world of private mortgages — based entirely on your risk tolerance and investment profile. If you still have questions about MICs or simply want to learn more about how to get started, contact us today to speak with one of our mortgage investment professionals.
