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The Difference Between Whole Mortgage Investing and MIC Investing

6 August 2020


In today’s market, striking the right balance between risk and reward has become daunting. Even traditional portfolios made up of stocks and bonds are struggling to protect investors in the face of extreme volatility, ballooning government deficits and a challenging macroeconomic backdrop. In this environment, alternative investments in real estate can shield investors from risk and inflation without having to compromise returns. 

When investors hear about ‘direct exposure to real estate,’ they often think about buying residential property for the purpose of renting or flipping. Many are unaware that you can get exposure to the real estate market by investing in residential mortgages. In highly desirable and stable real estate markets across  Canada, mortgage investing could be your ticket to higher yields without the huge capital requirements of purchasing a property outright. Time and again mortgages significantly outperform other fixed-income investments. 

Investing in mortgages usually takes one of two forms:

  • Whole mortgage investing
  • Mortgage Investment Corporation (MIC)

Both investment vehicles have their benefits, but each requires a different set of skills and risk tolerance. 


Private Mortgage

Whole Mortgage Investing

When you invest in an individual mortgage (or several mortgages), you are essentially purchasing a specific loan with its own risk profile. Credit scores, loan-to-value, income criteria, location and other factors that make up the loan must be carefully studied. Those who invest in individual mortgages usually have a high degree of expertise in the market (or work with someone who does) and are willing to be active participants throughout the term of the mortgage. In other words, they are not passive investors. 

Investing in individual mortgages has obvious payoffs. When you invest in mortgages directly, you don’t have to pay overhead or management costs that are typically associated with mortgage funds. Investing directly also has the potential to yield higher returns, especially for riskier mortgages. 

Although whole mortgage investing is often considered more lucrative, especially for second mortgages, it’s riskier than a Mortgage Investment Corporation. Whole mortgage investing is also capital intensive, which means the investor needs to be highly liquid if they want to manage multiple mortgages across various locations. In whole mortgage investing, the individual investor reaps all the benefits—but also assumes the full risk. 


Mortgage Investment Corporation

A mortgage investment corporation is a pool of capital that invests in private mortgages. Just as traditional mutual funds are made up of stocks and bonds, a MIC acts as an investment fund whose assets consist of carefully curated mortgages. 

When you deposit money into a MIC, you become a shareholder. Your money, along with the capital of other shareholders, is pooled and lent out as mortgages on residential and commercial real estate. The MIC aggregates and manages funds on investors’ behalf, thereby giving them direct exposure to the real estate market. 

A MIC is a passive investment vehicle because it requires minimal trading in the market. Investors, who become shareholders, do not participate in the mortgage process and are not involved in managing the fund. That work is carried out by the Mortgage Investment Corporation, which manages and administers the entire portfolio and pays out shareholders. This includes sourcing all mortgage opportunities, analyzing and underwriting mortgages and structuring legal transactions. 

The MIC generates income from interest and fees charged to the borrowers. The income is then passed on to investors in the form of dividends. Under Canadian law, a mortgage investment corporation must pay 100% of its net income to shareholders. These dividend payments are taxed as interest.  


Mortgage Investment Corp Canada

Benefits of Investing in Mortgages

Some of the best-performing mortgage investments generate annual returns of 8% to 10% or higher (in the case of individual mortgages). Investors who are looking for a safety net are much better off investing in a MIC than in other fixed-income securities like GICs or government bonds, which generate very little yield. 

You can compare the annual rate of return for the Canadian Mortgages Inc. MIC, Scotiabank GIC and Government of Canada bond below:

Mortgage Investing Yields

Although real estate investing is riskier than other fixed-income assets like government bonds, mortgage investment corporations have built-in buffers. These include investing in mortgages with a lower loan-to-value ratio and selecting properties in highly desirable urban centres. 

MICs also have a ‘natural’ buffer in that, regardless of the business cycle, people still tend to pay their mortgages, especially when they live in the home. If home values decline or the economy enters a recession, a MIC won’t necessarily lose money. 

Private MICs are also not correlated to the stock market, which means volatility in the TSX or S&P 500 won’t impact your mortgage investments. 

In the case of mortgage investment corporations, shareholders also receive special tax treatment under the Income Tax Act. So long as the MIC pays 100% of its profits and dividends to shareholders, it is not required to pay any income tax. Shareholders, therefore, avoid double taxation because the MIC does not have to pay tax on the interest it earns. 

Investors also have several ways in which they can participate in private MICs. You can invest through cash and registered savings plans, such an RRSP, RRIF and TFSA.


Canadian MIC

The Final Word

Traditional fixed-income assets like bonds provide shelter from market chaos, but perpetually declining yields have created significant opportunity costs. Investors who are looking to reduce their risk without giving up on yield are turning to real estate—and mortgages in particular. 

Although mortgage investing isn’t entirely risk-free, MICs that invest in prosperous and recession-resistant markets are far more likely to offer stable, healthy returns. Canada’s real estate market is among the most stable in the world, which makes it a prime location for mortgage investing. 

Canadian Mortgages Inc. has built one of Canada’s fastest-growing mortgage investment corporations. The CMI MIC funds mortgages in major urban centres with a target annual return of 8-9% net of fees.

Contact us by filling out the form below and one of our Investment Managers would be happy to provide you with more information on investing in mortgages with CMI. 


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