MICs (Mortgage Investment Corporations): A Smart Investment Option for Canadians

In today's dynamic investment landscape, Mortgage Investment Corporations (MICs) have been gaining popularity as a viable option for individuals seeking both consistent returns as well as income. Whether you're a seasoned investor or new to the world of finance, MICs may provide an appealing addition to your portfolio, particularly for Canadian investors. Let's dive into what MICs are, how they work, and why they may be a great fit for your investment strategy.

What is a Mortgage Investment Corporation (MIC)?

A Mortgage Investment Corporation (MIC) is a unique type of investment fund that pools money from investors to lend to borrowers in the form of residential or commercial mortgages. These loans are typically secured by real estate, making MICs a relatively lower-risk option compared to some other investments.

MICs operate by collecting capital from investors, which is then used to provide mortgages for real estate, often for borrowers who are unable to secure traditional financing. The corporation generates income primarily through interest payments on the mortgages it holds, which is then distributed to its investors.

MICs are typically structured as private corporations and must adhere to specific rules under Canadian tax laws. They are required to distribute at least 90% of their net income to shareholders in the form of dividends, making them attractive to income-seeking investors.

How Do MICs Work?

MICs operate similarly to mutual funds, except that they invest in real estate loans instead of stocks or bonds. Here’s how they work:

1. Capital Pooling: Investors buy shares in the MIC, pooling their capital together.

2. Mortgage Lending: The MIC lends the pooled funds to borrowers, often individuals or real estate developers, who require financing for property or property-related projects.

3. Interest Income: The borrowers make regular interest payments on the mortgages, and the MIC collects these payments.

4. Distribution to Investors: MICs are required by law to distribute the majority (at least 90%) of their income to investors in the form of dividends. These distributions are typically made on a monthly or quarterly basis.

This makes MICs an attractive option for those seeking steady income streams from interest payments, with the added benefit of diversification through real estate-backed investments.

Benefits of Investing in MICs

1. Attractive Returns: MICs often offer competitive returns compared to other types of investments, with yields typically being between 7% and 10% annually, depending on the specific fund and market conditions.

2. Diversification: By investing in a MIC, you gain exposure to the real estate market without directly owning property. This can add valuable diversification to your investment portfolio, especially if you're already invested in stocks, bonds, or other traditional assets.

3. Income Generation: MICs are an excellent option for investors seeking consistent income, as they distribute dividends regularly. This makes them particularly appealing to retirees or those looking for passive income.

4. Lower Risk Profile: MICs are generally considered lower risk than many other investments, as they tend to focus on well-secured mortgages. While many other investments can be considered as speculative, MICs have a long proven track record of stable and consistent returns.

5. Real Estate as Collateral: One of the most compelling aspects of private mortgage investing is the enhanced security real estate collateral offers. Real estate’s intrinsic value and historical appreciation further enhance investment security, making private mortgages a tangible and potentially lower-risk investment, compared to unsecured financial products.

6. Short Turnover of Loans: The mortgages in the pool are generally on short term contracts, with the average being about 12 months. This means the pool is recapitalizing with these funds every 12 months, with the interest being paid along the way. The shorter duration also helps with risk mitigation and keep the income continuously generating.

Investing in MICs through Registered Vehicles

A significant advantage of MICs is the ability to invest through registered vehicles such as RRSPs (Registered Retirement Savings Plans) and TFSAs (Tax-Free Savings Accounts). This allows you to grow your investment tax-efficiently and maximize returns without worrying about taxes on interest income.

• RRSP: Contributions to an RRSP are tax-deductible, and the income generated by the MIC is tax-deferred until withdrawal, typically during retirement when you may be in a lower tax bracket.

• TFSA: Any income earned within a TFSA is completely tax-free, making it an ideal vehicle for MIC investments if you want to avoid taxes on the interest and dividends earned from your mortgage investments.

By using these registered accounts, you can enjoy the dual benefits of diversification and tax efficiency, optimizing your overall portfolio strategy.

Strong Performance Over the Last Decade

MICs have demonstrated strong performance over the last decade, making them a compelling choice for Canadian investors. Many MICs have posted impressive annualized returns of 7% to 10%, with some funds achieving even higher performance during periods of strong real estate market growth.

For example, some prominent MICs have outperformed traditional asset classes like bonds and equities, particularly in times of economic uncertainty or market volatility. The real estate-backed nature of MICs, combined with the steady stream of income from mortgage interest, has provided stable returns for investors over the long term.

Furthermore, Canadian real estate has seen significant appreciation in value over the past ten years, particularly in urban areas such as Toronto, Vancouver, and Montreal. This trend has enhanced the value of the underlying mortgages held by MICs, contributing to their strong performance and providing a solid foundation for future growth.

Risks to Consider

While MICs offer attractive benefits, it’s important to keep in mind that, like any investment, they carry some level of risk. The key risks include:

1. Default Risk: Although MICs tend to lend to well-secured mortgages, there is still a risk that borrowers could default (the same risk Banks have when lending), which may impact returns. Although this doesn’t happen often, it is still something to consider in the calculation.

2. Interest Rate Risk: Changes in interest rates could affect the performance of the MIC, particularly if the fund’s portfolio includes variable-rate mortgages.

3. Liquidity Risk: Unlike publicly traded stocks or bonds, most MICs are not as liquid, meaning it may take longer to sell your investment if you need access to cash.

To mitigate these risks, it’s essential to have a well diversified portfolio and carefully research and select a MIC that aligns with your risk tolerance and investment goals.

Mortgage Investment Corporations offer a unique way to diversify your investment portfolio while gaining exposure to the real estate market. With attractive returns, stable income, and the ability to invest through tax-advantaged accounts like RRSPs and TFSAs, MICs can be an excellent option for Canadian investors looking to balance risk and reward.

Before investing, make sure to conduct thorough due diligence and consider speaking with one of our Financial Professionals to ensure that MICs are the right fit for your portfolio. With the strong performance seen over the past decade, MICs may just be the opportunity you're looking for to grow your wealth in a tax-efficient manner.

Stay informed, invest wisely, and enjoy the benefits of mortgage-backed growth!