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How Mortgage Investment Corporations Work

1 February 2021

Canada’s evolving economic and financial landscape has made Mortgage Investment Corporations, or MICs, more important than ever. MICs operate as pools of capital that invest in private mortgages on behalf of investors. Despite being one of the fastest-growing alternative asset classes in Canada, MICs are not well understood – and are sometimes mistaken for direct investments in real estate. 

MICs currently account for roughly 1% of the overall Canadian mortgage market and represent a growing segment of non-bank financial companies. As investor demand for MICs grows, it’s important to understand how they work — and what makes them different from traditional real estate investments.

How do MICs work?

MICs invest in mortgages, not real estate, and therefore provide exposure to the housing market without the added risk of property ownership or title transfer. Investment funds deposited into a MIC are pooled and lent out to qualified borrowers in the form of first and second mortgages, usually to meet short-term borrowing needs (i.e. usually between six and 24 months). In return, the MIC collects interest and fees from the borrowers, which are then distributed to the fund’s preferred shareholders as dividend payments, typically on a monthly basis. 

Because MICs are not bound by many of the same stringent lending requirements as traditional banks, they can set their own criteria for approving loans. MICs have a reputation for being more flexible with borrowers and much quicker to fund deals. This means they can charge higher interest rates on mortgages than traditional banks.

Mortgage Investment Corporations also enjoy special tax treatment under the Income Tax Act as a “flow-through” investment vehicle. To avoid paying income taxes, a MIC must distribute 100% of its net income to shareholders. The fund must have at least 20 shareholders, with no shareholders owning more than 25% of the outstanding shares. All investments need to be in Canada and at least 50% must be held in residential mortgages. 

How do MICs differ from REITs?

Whereas MICs invest in mortgages on residential properties and collect interest from borrowers, Real Estate Investment Trusts, or REITs, invest in physical properties, often with the goal of generating income by renting, leasing or selling them. Aside from residential property exposure, the two asset classes have little in common.

REITs typically invest in a combination of residential and commercial buildings. Some REITs provide direct exposure to office space, residential property, retail stores and healthcare facilities. Many are publicly traded companies, which makes them prone to market volatility and correlation with other asset classes. MICs, on the other hand, are typically shielded from broader macroeconomic trends like recession or weakening economic growth, especially in Canada, where homeowners have a strong history of paying back their mortgages even during periods of financial distress.  

Real Estate Investment Trusts have failed to keep up with Mortgage Investment Corporations and the broader stock market in recent years. Case in point: The S&P 500’s REIT category vastly underperformed the broader stock market over the past five years. The iShares U.S. Real Estate exchange-traded fund is up less than 7% since 2018. By comparison, CMI MIC Funds have historically generated anywhere from 6% to 11% annual returns, depending on the fund. 

How are MICs different from other fixed income investments?

One of the biggest draws of MIC investing is the potential for earning above-market returns compared with other fixed-income securities like government bonds. In the years where bond yields continually declined, Mortgage Investment Corporations and other alternative assets grew in popularity. Yields have rebounded since 2021 as central banks have raised interest rates – but real yields remain negative relative to inflation. By comparison, the CMI MIC Balanced Mortgage Fund generated a net annual yield of 8.57% in 2022, not unlike its performance in 2021 (8.39%) and 2020 (8.43%). 

Although central banks have raised interest rates aggressively to combat inflation, their actions have also stoked volatility. The string of banking collapses in early 2023 has been largely attributed to a duration mismatch in banks’ bond portfolios. This usually occurs when a bank holds long-dated securities that fall in value as yields rise, forcing them to sell at a loss to cover deposit and withdrawal demands in the short-term. As the landscape for fixed-income securities continues to evolve, MICs represent an increasingly compelling investment opportunity. 

Investing in MICs

MICs may be a suitable investment option for investors seeking exposure to the housing finance market without the same degree of risk or large investment minimum required by a whole mortgage investment. MICs provide diversification benefits since capital is spread across a broad range of private mortgages. A MIC also represents a passive investment opportunity as the fund is managed entirely by the Corporation and requires no input from the investor. 

CMI’s MIC funds are RRSP, RRIF, TFSA, DPSP, RESP and RDSP eligible.

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Updated March 28, 2003

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