More than 50 years after their creation, Mortgage Investment Corporations (MICs) have come to play a vital role in Canada’s residential mortgage market. For borrowers, MICs offer alternative lending solutions with greater flexibility than conventional mortgages. For investors, MICs unlock a passive income strategy that provides regular dividend payments without the risks that are normally associated with real estate.
Investors can optimize their MIC strategy by setting an appropriate time horizon for their investment. An investment time horizon refers to the amount of time that an investor expects to remain invested in an asset before needing to withdraw capital from their portfolio. Ideally, an investment time horizon should align with the amount of time over which an investor expects to achieve their financial goals.
Mortgage investment corporations (MICs) are suitable for investors with various time horizons. In this article, we will compare long-term and short-term MIC investment strategies, helping investors make informed decisions based on their financial goals and risk tolerance.
Understanding MICs and Investment Time Horizons
In Canada, a mortgage investment corporation (MIC) is an investment program and lending corporation that facilitates mortgages. MICs were established under the Residential Mortgage Financing Act of 1973 to enhance access to mortgage financing and support the growth and stability of the real estate market.. Today, MICs are governed as flow-through entities under the Income Tax Act and pay zero tax so long as they distribute 100% of their income to shareholders.
MIC investors are considered shareholders of the fund and are entitled to regular dividend payments generated through fees and interest charged to the borrowers. MICs are considered passive investments, with mortgage selection, administration, underwriting, and servicing handled by the corporation on behalf of the investor.
MICs are suitable for investors with a short-term or long-term time horizon, depending on their financial goals and risk tolerance. MICs typically finance short-term loans ranging from six to 36 months, making them suitable for investors with short-term goals. However, by reinvesting dividends over time, MIC investors can enhance their long-term investment goals as well.
Ultimately, which route an investor takes depends on their financial goals, risk tolerance, liquidity needs and underlying market conditions.
Long-Term MIC Investment Strategies
Mortgage investing has been shown to be a great portfolio diversifier that can help investors meet long-term investment goals, such as capital preservation and retirement planning. A long-term investment horizon refers to investments that are held for an extended period, typically spanning several years or even decades.
As a long-term investment, MICs provide opportunities for capital growth, diversification, and income generation. Long-term investors can benefit from dividend reinvestment and compounding that enhance overall returns in the long run. Some of Canada’s leading private mortgage investment providers, such as CMI MIC Funds, generate annual returns of between 6% and 11% annually. Over a long enough time horizon, MICs have been shown to be excellent inflation hedges. Since they’re not correlated with public markets, MICs have historically achieved their annual yield targets even during recessions.
When it comes to MICs, a long-term strategy is suitable for investors who prioritize retirement income, want to safeguard their portfolios against inflation, and are looking to diversify in an asset class that’s not as prone to recessionary risks in the same way as public markets.
However, these investors should remain cognizant of the challenges of a long-term strategy, such as interest rate risks, regulatory changes, and the need for ongoing due diligence. A mortgage lending corporation is responsible for monitoring market conditions and communicating any changes to its investment strategy.
Short-Term MIC Investment Strategies
MICs are an attractive short-term investment strategy because of their income generation potential. Although timelines vary, a short-term investment is generally defined as one that is held for fewer than five years.
Over the past 15 years, MICs have been one of the best-performing fixed-income alternatives in Canada. What’s more, their income generation potential has grown as demand for private mortgages continues to grow. As MICs typically pay regular dividends, usually monthly, they can be attractive options for investors with short-term income needs.
Some MICs also enable early withdrawal or redemption, making them suitable for short-term investors who may need to access their capital quickly. For example, shares of CMI MIC Funds can be redeemed without penalty after 12 months by giving 30 days’ notice ahead of the quarterly redemption period. Shares have a minimum investment term of one year, but there is no specific maximum duration. They do not mature or end after a fixed period.
Like other asset classes, MICs can be prone to drawbacks when used as a short-term investment strategy. Some of these drawbacks include higher transaction costs and lower overall yields. As such, this strategy is typically reserved for investors who believe they will need to access their capital within five years.
Comparing Long-Term and Short-Term Strategies
The choice between short-term and long-term MIC investment strategies depends on an investor’s financial goals, risk tolerance, liquidity needs, and outlook on market conditions.
Short-term MIC investments generally have lower return expectations, and higher transaction costs. They are also subject to risks from potential short-term changes in interest rates, economic cycles, and the housing market. Additionally, MICs are less liquid than investments like stocks or bonds. Selling shares in a MIC before the end of the prescribed minimum holding period can be challenging, if not impossible, and investors may not be able to access their capital quickly.
On the other hand, short-term MIC investments are less affected by long-term economic cycles compared to longer-term investments. Although short-term investments can be impacted by interest rate changes, they can adjust to these changes more quickly. This allows MIC investors to re-evaluate their strategies more frequently and adjust their portfolios in response to changing market conditions or personal financial goals.
In theory, long-term MIC investment strategies typically offer higher rates of return through compounding. Although past performance is no indicator of future success, MICs have historically outperformed over long periods thanks to strong demand for private mortgage loans and prudent underwriting guidelines followed by MIC operators.
While long-term investing involves greater exposure to market conditions and business cycles, real estate-backed investments, like mortgages, can act as a hedge against inflation. Property values and rental incomes often increase with inflation, helping to preserve the real value of the underlying real estate. Also, MICs invest in a diversified portfolio of mortgages, which helps spread risk across various borrowers, property types, and geographic locations. These diversification benefits are amplified over time and can enhance the stability and resilience of long-term returns.
Ultimately, the decision to proceed with a short-term or a long-term MIC investment comes down to the individual investor’s financial goals, risk tolerance, and investment horizon. Short-term MIC investments tend to focus on regular income payments, whereas long-term investments prioritize income generation and portfolio growth.
Crafting a Time-Sensitive MIC Investment Strategy
The first step in developing a MIC investment strategy is to identify your time horizon, risk tolerance and investment goals. By seeking professional advice, you can optimize your MIC investment strategy based on income and return expectations, investment horizon, and liquidity needs.
Partnering with the right Mortgage Investment Corporation is one of the biggest decisions you will ever make as a mortgage investor. Canada’s top-performing mortgage investment corporation (MIC) funds offer a variety of products tailored to different investor risk profiles and time horizons. These solutions span from conservative to balanced to high-yield, catering to a wide range of investor needs and preferences. To make an informed decision, you should carefully evaluate each MIC’s fact sheet to learn about the fund’s investment objectives, assets under management, and portfolio composition.
One of the unique advantages of MIC investing is it isn’t nearly as capital-intensive as other forms of private debt. For example, you can invest in CMI MIC Funds for as little as $5,000 and update your investment strategy over time if your personal circumstances change. CMI MIC Funds have a minimum investment period of only 12 months and offer flexible redemption options, allowing you to adjust your investment according to changes in your goals and timelines.
Like any other asset class, MIC investors should periodically review their current asset allocation compared to their target allocation. By doing so, you can identify imbalances and adjust your allocations to bring your overall portfolio back into alignment, or to adjust for any change in goals and preferences, such as yield objectives or risk tolerance. It’s important to seek professional advice before rebalancing, as these decisions may impact income distribution and tax treatment.
Conclusion
At one point or another, every investor will be faced with the choice of whether to invest for the short term or the long term. For many investors, an optimal strategy includes a combination of investment horizons.
Mortgage Investment Corporations (MICs) are suitable for both short-term and long-term investment strategies. However, it’s important to consult with a trusted mortgage partner before making any investment decision.
CMI Financial Group is one of Canada’s fastest-growing private mortgage lenders. Our CMI MIC Funds offer short-term and long-term investment strategies that are geared toward conservative, balanced and high-yield investors.
To learn more about CMI MIC Funds, fill out the form below to schedule a call with one of our investment professionals.
