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Private Mortgages: An Unparalleled Investment Option for Yield, Capital Preservation and Risk Mitigation

30 September 2021


A successful investment strategy isn’t just one that generates a reasonable rate of return. Factors such as capital preservation and risk mitigation are equally as important when building wealth over the long term.

Finding an investment that provides a good rate of return while also serving as a risk and capital buffer is rare in today’s market. Usually, investors need to create a balanced portfolio of stocks and bonds to gain an appropriate balance between risk, return and capital preservation. As a subset of alternative investments, private mortgages give investors the opportunity to generate predictable returns while also controlling for risk. Depending on how they are structured, private mortgage investments can also fulfil the need for capital preservation for investors with a more risk-off profile.



Yield Opportunity

Private mortgages are considered fixed-income securities, which means their performance should be compared with government and corporate bonds and Guaranteed Investment Certificates (GICs). With the Bank of Canada suppressing interest rates for more than a decade, yields on government bonds are exceedingly low, averaging between 1-3%, depending on the date of maturity. When factoring inflation, real yields are either negative or barely breaking even. Forward guidance from the Bank suggests interest rates will remain low for the foreseeable future.


Compare that with mortgage investing, where investors can earn annual yields between 6% and 16%, depending on their investment preferences and risk profiles. Top mortgage lenders typically have a strong and consistent track record of meeting their annual yield targets. They also have the ability to generate higher rates of return for their investors by lending in a variety of regional markets outside of major urban centres.


Capital Preservation

In addition to generating competitive yields compared with traditional fixed-income securities, private mortgage investments offer capital preservation benefits by virtue of being backed by the collateral security of the borrower’s property. These benefits can be enhanced by investing in more conservative mortgages, such as first mortgages, as well as those with a lower loan to value (LTV). LTV is a relative measure based on the size of the mortgage compared to the market value of the property. Typically, a mortgage amount that is less than 50%-60% of the market value of the subject property is considered a low LTV. Of course, like all other investment vehicles, mortgage investments with an enhanced focus on capital preservation offer lower yields relative to those with a more aggressive risk profile, such as those with a focus on second and third mortgages or higher LTVs.


Private mortgages are inherently less volatile than traditional stock and bond investments, as they are uncorrelated with public markets. Moreover, capital preservation features increase the probability that a portfolio with mortgage exposure can weather unexpected events. This was best demonstrated by the COVID-19 pandemic, where volatility rocked global stock and bond markets, but mortgage investments remained relatively stable.



Risk Mitigation

Beyond their search for yield, many investors diversify into private mortgages because they want to hedge against the inherent volatility of public markets. Canada’s private mortgage market is uncorrelated with stocks, bonds, commodities and other publicly traded securities, so this asset class is a complementary alternative from the perspective of general investor sentiment.


Although there is no such thing as a zero-risk investment, leading private mortgage companies employ robust risk management practices when evaluating and underwriting mortgages. This includes evaluating the mortgage applicant to verify income, assets, debt and repayment history. The quality and location of the property is also reviewed. Investors can verify a private lender’s risk management practices by reviewing the fund’s prospectus or investment profile.


Lenders with verifiable due diligence and risk management practices are better positioned to meet investors’ goals with respect to yield, risk mitigation and capital preservation. Industry leaders provide investors with a range of investment options depending on their risk profiles and investment objectives, as well as time horizon.


CMI Financial Group is one of Canada’s fastest-growing private mortgage lenders. Since inception, CMI has funded more than $800 million in mortgages across the country. Our programs provide investors with competitive fixed-income products while maintaining a strong focus on capital preservation and risk management. To learn more about our investment process, contact one of our investment managers today

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