Mortgage Investment Corporations (MICs) are one of the fastest-growing alternative assets in Canada, yet they’re often misunderstood by investors. This article will demystify the complexities surrounding MIC investing, focusing on investor profiles for various funds. From conservative to more aggressive investment approaches, the article will guide readers through the nuances of MIC investment strategies, facilitating informed decision-making for potential investors looking for exposure to the dynamic Canadian real estate market.
A MIC is an investment and lending company that lends money to borrowers who need mortgage financing, usually on a short-term basis. MIC investors become preferred shareholders in the corporation, where they earn a share of the interest and fees collected from borrowers.
MICs have been around since 1973 and have grown to become one of the primary sources of alternative lending in Canada. Because MICs do not conform to the strict financing guidelines imposed by banks, they’ve become attractive lending sources for millions of Canadians.
For investors, MICs offer the most efficient pathway into the Canadian mortgage market — providing exposure to residential real estate without the risk of homeownership or title transfer. MICs are an attractive investment opportunity because they provide a source of income for shareholders with annual returns that have historically outperformed other fixed-income securities such as bonds and Guaranteed Investment Certificates (GICs). MIC strategies range from conservative to high-yield, so they’re suitable for a range of investors.
CMI Financial Group is one of the largest non-bank financial institutions in Canada, focusing exclusively on the mortgage market. Our CMI MIC Funds have been engineered to deliver returns based on three specific risk/return profiles: conservative, moderate, and aggressive.
CMI MIC Prime Mortgage Fund
The Prime Mortgage Fund invests in short-term (6-24 months), primarily first position residential mortgages with an average weighted loan-to-value ratio of 65% or less. It has the most conservative risk profile of the three CMI MIC Funds. With a 6 – 7% targeted annual return, the fund provides a passive investment opportunity in a diversified pool of mortgages in prime real estate markets across Canada. It has consistently delivered its target returns since its inception.
The Prime Fund is designed for defensive investors seeking regular income who value capital preservation and portfolio diversification. These more conservative investors are willing to target lower returns in exchange for more modest risk exposure.
Common profiles of Prime Fund investors are those nearing or in retirement or who have prioritized specific savings goals, such as saving for their children’s or grandchildren’s education.
Dividends are paid monthly, and the fund can be included in registered plans like RRSPs and TFSAs. CMI offers investors the potential to increase their investment principal and compound their returns through its optional dividend reinvestment program (DRIP). Under the DRIP, investors can automatically reinvest monthly their dividends into additional shares of the same fund, rather than receiving distributions in cash. This
The Prime Fund is RRSP, RRIF, RESP and TFSA eligible.
CMI MIC Balanced Mortgage Fund
The Balanced Mortgage Fund has a slightly higher risk profile than the Prime Fund and is designed for the moderate-risk investor who seeks to balance risk and return. The fund invests in a diversified pool of primarily first and second residential mortgages with an average weighted maximum loan-to-value of 75%. The fund focuses on stable, high-growth and recession-resistant markets across Canada. It targets net annual yields of between 8% and 9% and has successfully achieved its targets since its inception in 2015. The Balanced Fund has more than $142 million in assets under management (AUM) as of December 2023.
Dividends are paid monthly, and the fund is RRSP, RRIF, RESP, TFSA, and DRIP eligible.
CMI MIC High Yield Opportunity Fund
The High Yield Opportunity Fund seeks to maximize investor returns within CMI’s rigorous mortgage selection and adjudication process. The fund invests primarily in second mortgages with an average weighted maximum loan-to-value of 85%. The fund is designed to generate net annual returns of between 10% and 11%. As such, it’s an attractive option for more aggressive investors who accept higher potential risk in exchange for higher potential returns. From a performance perspective, the fund has reached its targets consistently since its inception. Since 2020, the High Yield Opportunity Fund has grown its assets under management to $116 million.
Although the High Yield Opportunity Fund has the most aggressive profile relative to the other CMI MIC funds, risk is mitigated through diversification and a rigorous mortgage selection process.
Like other CMI MIC funds, the High Yield Opportunity Fund pays out dividends monthly and is RRSP, RRIF, RESP TFSA, and DRIP eligible.
Risk Considerations and Market Trends
In 2021, the Canada Mortgage and Housing Corporation (CMHC) described MICs as one of the fastest-growing segments of the residential mortgage market, accounting for between $13 billion and $14 billion of Canada’s mortgage debt load by the end of 2020. According to CMHC data, Canada’s leading MICs saw their assets under management increase by 7.1% year-over-year in the first quarter of 2023.
MICs have become an integral part of Canada’s mortgage market due to more stringent lending requirements imposed on traditional banks. In practice, new federal mortgage guidelines meant that a large swathe of the Canadian population was classified as a “high-risk” borrower. Small business owners, entrepreneurs, individuals with lower credit scores, and those with non-traditional income, like gig workers, have been included in this “high-risk” category. Many of these borrowers have turned to alternative lenders, such as MICs, for their financing needs.
Some experts warn that Canada’s mortgage market is under pressure due to rising interest rates. While higher rates have impacted home buying, the mortgage market remains healthy. According to the Canadian Bankers Association, more than 99% of mortgage holders in Canada are in good standing with their lenders. And while delinquency rates for MICs are slightly higher than chartered banks, the recent spike in mortgage rates hasn’t been a major concern.
Per CMHC data, MIC delinquency rates were only 0.88% in the first quarter of 2023 compared to 0.15% for chartered banks. That’s a slight uptick from 0.69% in the second quarter of 2022 when rates began to rise.
Conclusions: MICs are an Excellent Portfolio Diversifier
Mortgage Investment Corporations are a proven alternative asset class and an excellent diversification tool for many investors. Even when factoring in the recent rise in interest rates, MICs continue to outperform traditional fixed-income securities without assuming unnecessary risk.
CMI Financial Group has facilitated more than $2.5 billion in successful mortgage placements. Our CMI MIC Funds continue to provide access into Canada’s residential mortgage market — based entirely on investors’ risk tolerance and investment profiles.
If you still have questions about CMI MIC Funds or want to learn more about how to get started, contact us to learn more.
