Mortgage Investment Corporations (MICs) are one of Canada’s fastest-growing alternative assets, offering investors the potential to earn higher yields than traditional fixed-income products like government bonds or Guaranteed Investment Certificates (GICs). While a MIC investment strategy benefits from growing demand for alternative lending solutions, its yields are still influenced by the Bank of Canada’s (BoC) monetary policy decisions. Interest rate changes set the tone for the broader lending environment, directly impacting borrowing costs, mortgage demand and the performance of underlying mortgage portfolios.
Since initiating its post-pandemic easing cycle in mid-2024, the BoC has implemented seven interest rate cuts, bringing the policy rate down from a peak of 5% to its current level of 2.75%. Canada’s central bank is cutting interest rates aggressively to support a cooling economy and ease financial pressures, with a looming wave of mortgage renewals in 2025 and 2026 adding to broader concerns about consumer resilience.
In a declining interest rate environment, MIC investors may continue to benefit from strong demand for private lending, but yields could face some downward pressure over time as broader mortgage rates fall. Staying engaged with your MIC provider and monitoring portfolio quality and return targets will be key to navigating this shift
How Interest Rates Influence MIC Performance
The relationship between the BoC’s policy rate, mortgage lending rates and MIC performance is dynamic and influenced by several factors. On one hand, a MIC investment strategy is appealing to fixed-income investors because private mortgages lending rates – and therefore yields – are largely driven by supply and demand. As demand for flexible, non-traditional mortgage solutions grows, private lenders can often command higher interest rates. On the other hand, central bank policy still exerts a gravitational pull on private mortgage lenders; as interest rates decline, MICs may face pressure to lower the rates charged on new originations, which can gradually lead to lower yields.
The profitability of a MIC investment strategy is influenced by several factors, including interest income, credit quality, cost of funds and administrative costs. Declining interest rates can impact a MIC’s profitability by narrowing the spread – the difference between its lending rate and its operating and capital costs. Declining rates may also increase competition among lenders, pressuring MICs to accept lower yields to maintain market share.
On the positive side, a lower-rate environment can improve borrowers’ repayment capacity, potentially improving the credit quality of a MIC’s mortgage portfolio. Lower rates can also stimulate lending activity and increase deal flow, potentially boosting mortgage demand over time.
Changes in interest rates influence MIC performance gradually over time, as new mortgages renew or are replaced by new loans priced based on the current rate environment. For example, since MICs typically manage short-duration mortgage portfolios – generally ranging from six to 18 months, with an average term of 12 months – it would take about a year for the entire portfolio to roll over and reprice at the new rate level
Longer-term interest-rate trends impact strategic positioning. yield sustainability and risk exposure of MICs. Fund managers must actively monitor these trends and adjust the portfolio to align with evolving market conditions, ensuring that returns remain optimized while managing risk.
Recent Interest Rate Changes and Their Effect on MIC Yields
The BoC has lowered interest rates aggressively since mid-2024 due to concerns about a weakening economy. US President Donald Trump’s escalating trade war may give the BoC room to continue lowering rates for the rest of 2025, according to TD Director of Economics James Orlando.
The reduction in the BoC’s policy rate has led to lower mortgage rates, which has compressed the profitability of MIC funds. As traditional lenders reduce rates, MICs have faced increased pricing pressure, which could lead to further margin compression. Lower interest rates result in reduced income from new mortgage originations, impacting a MIC investment strategy’s overall portfolio returns.
On the positive side, lower borrowing costs have improved affordability, helping mortgage borrowers manage their debt more effectively and potentially reducing delinquency rates. As fewer loans become delinquent, the risk of defaults – and overall default rates – for MICs and traditional lenders may also decline.
Stabilizing or increasing property values in a low-rate environment can improve loan-to-value ratios, strengthening the security of MICs’ mortgage portfolios. As the Canada Real Estate Association (CREA) reported in January, the average Canadian home price is forecast to rise by 4.7% in 2025, and by another 3.3% increase in 2026.
Key Indicators MIC Investors Should Monitor
MIC investors should keep a close eye on key indicators that can help them anticipate and manage the impact of interest rate changes on their portfolios. At the top of the list are the BoC’s policy announcements, as the central bank sets the tone for the overall interest rate environment, which in turn affects mortgage pricing and can impact borrower demand. The BoC makes interest rate decisions eight times each year.
Since interest-rate policy is largely driven by inflation trends, investors should also monitor the monthly Consumer Price Index (CPI) reports from Statistics Canada. The BoC targets inflation at 2%, with any major deviation from that target prompting greater scrutiny from policymakers. A sudden decline in CPI could trigger further rate cuts, while an unexpected rise may prompt rate hikes.
Employment trends are another important factor. with Rising unemployment typically puts downward pressure on interest rates as policymakers seek to stimulate economic growth. Statistics Canada releases national labour market reports each month.
Finally, investors should also monitor housing market trends, such as home prices and sales volumes on both a national and regional level. These indicators should be assessed alongside trends in delinquency and default rates, refinancing activity and loan renewals to provide a more complete picture of mortgage borrowers’ financial health.
Strategies for Investors in a Volatile Rate Environment
In a volatile interest rate environment, a MIC investment strategy can be strengthened through diversification. In private mortgage investing, this includes diversification across geographies, borrower profiles, security positions, and property types. Leading MIC funds diversify across multiple loans and real estate markets, helping investors generate more predictable returns while mitigating the impacts of sharp interest rate fluctuations.
Investors should also monitor MIC management practices and the fund issuer’s responsiveness to changing market conditions. MICs that focus on shorter-term loans or floating-rate structures are better positioned to adapt during periods of rate volatility.
New MIC investors should carefully assess the risk management practices of private mortgage funds, prioritizing those that focus on yield stability and capital preservation. These funds are typically suited to investors who value predictable cash flow, low volatility and downside protection.
Conclusion
To achieve its dual mandate of price stability and maximum employment, the Bank of Canada may need to adjust interest rates – sometimes significantly. MIC investment strategies that prioritize consistent distributions , low volatility and diversification are better positioned to navigate these changes and capitalize on the increased mortgage demand that often accompanies lower interest rates. MIC investors are encouraged to regularly review their portfolios and remain engaged with market trends.
CMI Financial Group is one of Canada’s fastest-growing non-bank financial service providers, with more than $3 billion in successful mortgage placements and over $1 billion in assets under management. Our CMI MIC Funds provide direct access to Canada’s residential mortgage and real estate markets, tailored to investors’ goals and risk tolerance. To learn more about CMI MIC Funds, explore our fund offerings.
You can also contact CMI to schedule a call with our Wealth Advisory Team.
