Despite current economic and financial conditions, investors know that every market presents an opportunity. Investors who’ve spent years maximizing their returns are always looking for different ways to grow their portfolios. For sophisticated investors, private mortgages present a unique investment opportunity.
Canada’s private mortgage market continues to expand rapidly, with private lenders extending $72.1 billion worth of private loans in the second quarter of 2021, a new record according to Statistics Canada. In all of 2021, private lenders extended $242.4 billion worth of loans, capping off a strong year of growth for alternative mortgage financing. Though mortgage lending slightly declined from its peak, this reflected a broader downtrend in mortgage financing across the country. Private lenders have seen their role expand significantly over the past decade due to growing consumer demand for non-bank mortgages, and continue to gain market share as a percentage of the overall lending industry.
A Profile of Mortgage Investors
Private mortgage investors represent a diverse group of interests that includes professionals, doctors, lawyers, business owners and other high-net-worth individuals. Generally, these investors have an extensive understanding of markets, considerable years investing, and a strong appreciation for alternative investment opportunities with compelling risk-reward profiles like private mortgage investing.
In most cases, accessing private mortgage markets requires meeting a minimum income threshold and other net worth and asset qualifications, also known as accredited investor guidelines. In Canada, an accredited investor is someone who possesses at least one of the following:
- Before-tax income of at least $200,000 for two consecutive years
- Net assets of at least $5 million (alone or with a spouse)
- Net worth of at least $1 million (alone or with a spouse)
- Registered under securities legislation as a dealer or advisor
For investors interested in spreading their capital across a number of mortgages, rather than funding an entire transaction, Mortgage Investment Corporations, or MICs, are another option to access the mortgage market. MICs are investment vehicles designed to pool investor capital for the purpose of providing loans to individuals and companies purchasing properties. MICs offer greater diversification benefits with more flexible investment minimums and do not require accredited investor status.
The Case for Mortgage Investing in 2022
Faced with soaring inflation and increasing volatility in public equities, many investors are increasing their exposure to alternative assets, including by investing in mortgage debt. Mortgages are a compelling investment during periods of uncertainty as they are typically defensive and can offer relatively predictable returns.
Mortgages are one of the fastest-growing alternative asset classes, and for good reason. A diversified mortgage portfolio can be an effective way to hedge against uncertainty and rising cost pressures. Mortgage investments can also provide investors with a higher rate of return than many traditional fixed-income portfolios consisting of government and corporate bonds and other lower-interest securities.
Because mortgage investments carry different risk profiles than traditional fixed-income securities, they typically have higher yield potential. Private mortgages charge higher interest rates and fees than traditional mortgages to compensate investors for lending to borrowers with a slightly higher risk profile.
Through investing in mortgages, investors can also shield a portion of their portfolio from public equity fluctuations, something more difficult to accomplish with a more conventional 60/40 portfolio split of stocks and bonds. While most investors are encouraged to have investment exposure to public equities, overexposure can lead to underperformance, especially when that performance is tied to macroeconomic factors like inflationary pressures and the effects of monetary policy, things beyond an investor’s direct control.
Real estate investments are not completely immune to broader economic trends, but mortgage investments offer an entirely different risk profile than buying into residential properties directly. While the recent market downturn has seen property values fall from record highs, investor returns in mortgage debt are not directly correlated to the value of the underlying properties. Canada’s mortgage market continues to offer opportunities for diversification in areas where demand for private lending is growing considerably.
CMI Mortgage Investments is one of Canada’s fastest-growing non-bank financial services providers, with more than $1.4 billion in successful mortgage placements since inception and currently over $675 million in assets under management. Whether you are an individual investor or part of a corporate entity, CMI provides a uniquely personalized investment experience, backed by rigorous lending standards and an end-to-end solution for sourcing, assessing and adjudicating loans. Learn more about the great advantages of investing in private mortgages by contacting one of CMI’s investment managers for a free consultation.
Create your customized CMI portfolio today and see why private mortgages are one of Canada’s fastest growing alternative investments.