What are Mortgage Investment Corporations and are they worth investing in? Find out here
Updated November 10, 2023
Mortgage Investment Corporations (MICs) can be an attractive investment for wise investors. As a source of funds for the Canadian real estate market, this alternative to traditional loans and financial institutions can be a good strategy for wealth accumulation or wealth preservation.
In this article, we delve into important information about MICs. We explore their benefits, how they are regulated and how both borrowers and investors can benefit from them.
The MIC is an investment tool that was first introduced by the Canadian Government in 1973 under the Residential Mortgage Financing Act. Its original purpose was twofold:
- encourage private financing
- make investing in real estate and mortgages more accessible for smaller investors
The MIC is a bit like another popular investment tool, the mutual fund. In fact, its alternative name is mortgage investment fund. And just like a mutual fund, the MIC pools money from several investors.
Instead of using the pooled funds to buy stocks or bonds, an MIC pools mortgages. This is done by giving out loans to borrowers, usually mortgage brokers. These brokers then loan the money out by issuing mortgages to residential, commercial, and industrial developers.
MICs can also issue residential mortgages to individual would-be homeowners. Investors become shareholders in the MIC, and the income they earn is from the interest and fees charged to a portfolio or pool of mortgages.
The money invested is issued as shares or units, representing each investor’s ownership in the corporation. Borrowers make regular interest payments on their mortgages, which are then distributed to investors as interest income or dividends.
The MIC can also earn additional profits from fees charged to borrowers or via other investment activities.
It’s been said that MICs have similarities to mutual funds, but they also share some similarities with Real Estate Investment Trusts (REITs). REITs and MICs both deal in real estate; REITs get their income from rent, while MICs get their income from the interest on mortgage payments.
Learn more about MICs in this video:
Investing in an MIC offers some key benefits for borrowers and investors alike. Here are some of the advantages for each group.
Borrowers of a MIC, like home buyers, can customize their loans and have payment terms ranging from 6 to 36 months. Borrowing from a MIC can also provide a better, more accessible alternative to home buyers who may have been rejected by credit unions, banks, or other loan facilities.
Investors in an MIC can reap a number of significant benefits. For one, this type of investment has a high growth potential; some MICs can promise high returns, sometimes twice that of bank deposits.
Other benefits for investors include:
- Often handled by experts – some MICs have been in the business for decades and have skilled professionals. MIC managers can be those with a solid background in mortgage financing. Their familiarity with different lending scenarios enables them to make quick, informed decisions that can strengthen investors’ portfolios and mitigate risks.
- Investment portfolios are diversified – MICs offer a broad range of residential, commercial, and industrial mortgages that can max out returns and effectively manage risk levels of investment portfolios.
- MICS are a more secure investment – In this type of financial institution, real estate property (real assets) secure the mortgages, while insurance policies and personal guarantees provide the financial security.
- MICs get tax breaks – Shareholders of a MIC don’t have to worry about paying double the taxes when the corporation earns interest income. MICs in Canada get preferential treatment when it comes to taxes, with capital gains and cash inflows remaining untaxable under the Income Tax Act.
In general, yes. Most MICs are considered as low-risk investments that give high returns.
Borrowers from an MIC have to go through stringent checks and meet strict requirements before they get their mortgages approved and are lent the money. It is then their obligation to pay for the monthly mortgage obligations and pay the principal amount along with the interest of the loan.
Since mortgages are only given to those who are capable of making the payments, MIC investments are deemed safe.
As of 2022, MICs are regulated under the Income Tax Act, particularly Section 130.1. It says that a MIC must pass the following criteria for its entire tax year to keep its status:
1. It must be and remain a Canadian corporation.
2. None of the MIC’s property are composed of:
- Shares of capital stock in corporations outside Canada
- Real or immovable property located outside Canada, or leasehold interests in them
- Debts owed to the corporation secured on real or immovable property located outside Canada
- Debts owed to the corporation by non-residents on real or immovable property located in Canada
3. It is engaged only in the investing of funds of the corporation, and it did not manage or develop any real or immovable property.
4. At least 50% of the corporation’s costs amount to all its property, consisting of any combination of:
- Deposits of the corporation in a bank or credit union account
- Debts owed to the corporation that were secured on homes or property within a housing project
- The cost of all real or immovable property, including leasehold interests, does not exceed 25% of the corporation’s cost of all its property
5. The corporation’s liabilities do not exceed the limits stipulated in the Act.
6. The MIC has had at least 20 shareholders. No single shareholder, solely or together with any relatives, has owned more than 25% of the total outstanding shares at any time. This applies whether such shares are held by the shareholder or their relatives directly or through a trust or partnership.
7. Preferred dividends paid to preferred shareholders must be a similar amount per share when paying dividends to the common shareholders. Preferred shareholders are entitled to dividends pari passu with the common shareholders’ dividends in any additional dividends.
As an investor, it’s tempting to simply look at the Return on Investment (ROI) on a particular MIC and choose them based exclusively on this criterion. To choose the best possible MIC, here’s what investors should look for:
Checking their performance can help you decide whether the MIC is worth your investment. Request information detailing the MIC’s target ROI compared to their actual ROI for the past 5 to 10 years. This can give you a sense of how well they can predict their ROI, and also whether they can consistently meet or exceed their projections.
When shopping for an MIC, always check their liquidity agreement first to avoid a liquidity mismatch. You do this by checking the MIC’s liquidity agreement to know how quickly your investment can be withdrawn.
Don’t let yourself get caught in a situation where you need the money, only to realize that your invested amount is locked in a long waiting period. Some MICs only allow redemptions of investments once a year.
Effective, regular communication
Prudent and savvy MICs realize that the most important questions are those that shareholders don’t need to ask. Check to see if the MIC provides clear reports regularly and can handle spur-of-the-moment requests for information. This is important as there may be cases where you’ll need the relevant details about your investment.
A good prospective MIC should have an investor relations manager. They should be adept at answering all your questions, can provide additional information, and help you understand their product.
Matching risk tolerance
The MIC you’re looking at investing in should have a diversified portfolio and have risk tolerance levels that complement your own. Check the specific housing markets that comprise your prospective MIC’s portfolio. Knowing whether they’re urban or rural properties, first or second mortgage loans impact how a MIC sets its interest rates, potential earnings and potential pitfalls of the investment.
Inquire about how and when the MIC pays out dividends, especially if you intend to reinvest them. Remember that investments in MICs are compounded at a set schedule, and MICs issue dividends at different times – some annually, some quarterly, and others, on a monthly basis.
As of 2020, the total market for mortgage debt in MICs was already between $13 to $14 billion. In that same year, the share of all outstanding Canadian mortgages held by MICs is still about 1% to 2% of the entire mortgage market.
From 2019 to 2020, the average loan-to-value ratio remained at 59% for MICs with more than $100 million assets under management (AUM) and 64% for MICs with less than $100 million AUM.
MICs stayed relatively stable and unaffected by the recent pandemic and continues to account for 1% of the entire Canadian mortgage market.
Mortgage investment corporations are alternative lending firms that can benefit borrowers and investors alike. When creating an alternative fixed income investment, MICs are an excellent choice.
On their own, MICs can offer significant returns and diversification. Although an even better strategy would be to combine these with fixed income instruments like money market mutual funds. Savvy investors would do well to make a MIC part of for their portfolios, but only after doing their homework and choosing only among the best MIC investments in Canada.
Now that you know more about MICs, which of them will you add to your portfolio? How do these compare to your other investments? Let us know in the comments!