If you’re invested in traditional equities, you’ve likely seen the value of your portfolio decline substantially in 2022. Stocks are coming off their worst six months of a year since 1970, stoked by fears of recession, geopolitical conflict, generational inflation and higher interest rates. Mortgage investing and indirect exposure to residential real estate offer reprieve from the volatility.
You may be thinking, how could mortgage investing improve my portfolio when home sales are declining, and property prices have stalled? The answer lies in how mortgage investments are structured. Below are five compelling reasons why investors should consider incorporating mortgages into their portfolios.
Steady cash flow
Mortgage investments are geared toward investors who want to generate cash flow by lending money to homebuyers in exchange for interest payments and other fees paid by the borrower. These mortgages typically carry higher interest rates and fees than loans issued by traditional banks. As such, well-structured mortgage portfolios at a reputable non-bank financial institution could generate significant cash flow. In the case of CMI Mortgage Investments, our portfolios generate between 7% and 16% annual returns – a scale that depends on an investor’s risk tolerance and available investment capital.
Exposure to real estate focused on risk mitigation
Mortgage investments are sometimes erroneously compared to real estate investments or real estate investment trusts (REITs), which provide direct ownership of physical properties. A mortgage portfolio invests in mortgages (debt), not real estate (equity), which means it provides exposure to the housing market without the risk or liabilities of property ownership. However, each mortgage is backed by the underlying property, which significantly reduces the risk. While home sales have declined across Canada, mortgage delinquency rates have remained remarkably stable, according to the Canada Mortgage Housing Corporation. Therefore, your mortgage investment portfolio does not necessarily depend on sudden shifts in the housing market.
Non-correlated with public markets
When stocks are in a bull market, like during significant stretches of the past 12 years, holding non-correlated assets doesn’t seem like an immediate priority. However, when volatility hits and public markets decline, the need for exposure to non-correlated assets becomes more obvious. Mortgage investments are not correlated to public markets and therefore do not exhibit the same volatility profile as, for example, the S&P 500, emerging market stocks or commodities. In other words, mortgage investments aren’t directly impacted by volatility in the underlying value of the property. This is further reinforced by the fact that, in general, Canadian homeowners have a strong track record of paying their mortgages – a trend that remained consistent even during the height of the COVID-19 pandemic.
Diversification is one of the hallmarks of successful value investing because it helps reduce risk. Adding a non-correlated alternative investment like mortgages to your portfolio provides strong diversification benefits during periods of volatility in public markets. A well-structured mortgage portfolio is also diversified geographically and by mortgage type to provide a suitable blend of risk-adjusted returns.
Ideal for retirement planning
Volatile market conditions are a reminder that you need to factor risk and uncertainty when investing for the long term. When the value of your portfolio declines during a bear market, it’s important to have exposure to a higher-yielding investment that produces income over time. Mortgages are suitable for retirement planning because they provide passive income while also being eligible for tax-deferred investment plans, such as RRSPs, TFSAs and RRIFs. As such, mortgages help you optimize your retirement without having to worry too much about the cyclical nature of public markets.
Are you looking to explore the benefits of mortgage investing? CMI Mortgage Investments is one of Canada’s fastest-growing non-bank financial institutions specializing in the residential mortgage sector. Since inception, CMI has originated more than $1.5 billion in mortgages across Canada, providing our investors with a range of alternative mortgage investment options with competitive returns. Speak to an Investment Manager today to learn about the mortgage investment options available to you.