Private Mortgage Investments in Canada
Investing in private mortgages allows you to receive a steady stream of income while diversifying away from stocks and bonds. Becoming a private mortgage lender doesn’t mean that you need to be a corporation or business. As a private investor, you can invest individually in mortgages or invest in a pooled fund with other private investors. Private mortgages may allow you to receive a higher rate of return than other investment options, however private lending can come with higher risks.
Mortgage Investment Corporation (MIC)
Mortgage Investment Corporations pool funds from a large number of private investors to lend out as private mortgages. Similar to purchasing regular stocks, a person looking to invest in private mortgages can simply purchase shares of a MIC. Some MICs that are publicly traded on the Toronto Stock Exchange (TSX) include Atrium Mortgage Investment Corporation, MCAN Mortgage Corp, and Timbercreek Financial. You can buy stocks using a stock trading platform or brokerage.
What is considered a MIC?
A corporation can only be defined as a mortgage investment corporation if its operations is to invest funds in property, not to manage or develop property. This means that a MIC cannot be a property manager or a real estate developer. MICs must also have 20 or more shareholders. No individual shareholder can hold more than 25% of the MIC’s issued shares.
MICs can only invest in properties located within Canada, and at least 50% of a MIC's portfolio must be invested in Canadian residential mortgages, cash, or insured deposits.
Investors in a MIC earn money through dividends. Some MICs issue preferred shares which act like bonds by providing a fixed dividend rate. Income earned by MICs are not subject to corporate income tax. Instead, investors of the MIC pay tax on their dividends as interest income, not as dividend income. This allows MICs to act as a flow-through entity. Since MICs are not taxed, MICs must distribute their income out to their investors as a dividend.
If a corporation breaches any of these requirements, the corporation will lose their MIC status. This will result in the corporation’s income being taxed, and a lower return for investors in the MIC.
What do Mortgage Investment Corporations do?
Most MICs invest in high-yield mortgages with a short term length. For example, Atrium's average mortgage term is 18 months, while their average yield from first, second, and third mortgages is 8.65%.
Even though MICs often have high-yields, MICs do not necessarily chase after risky mortgages. MICs often only lend to homeowners with a sizable amount of equity in their home. For example, 91.4% of Atrium's portfolio is held in mortgages with a loan-to-value (LTV) ratio below 75%.
Usually, a private mortgage’s APR includes the mortgage rate and the lender’s fee charged. Some MICs earn these mortgage origination fees. For example, MCAN earned $555,000 origination fees in Q3 2020, which represented 1.55% of their total income.
MICs, Registered Accounts, and Taxes
MICs distribute their income out to investors through dividends. Although investors receive dividend payments, these dividend distributions are considered to be interest income, not dividend income.
Interest income from MICs are not eligible for dividend tax credits or gross-ups when calculating tax credits, which means that private mortgage investors in a MIC will pay the full amount of tax applicable on their MIC earnings.
Private mortgage investors can avoid or defer income tax on their investment earnings by using registered accounts. Interest income received can remain tax-free within Tax-Free Savings Accounts (TFSA), Registered Retirement Savings Plans (RRSP), Registered Education Savings Plans (RESP), Registered Retirement Income Funds (RRIF), Deferred Profit Sharing Plans (DPSP), and Registered Disability Savings Plans (RDSP).
Not all MICs are eligible to be held within a registered account. Using a registered account to invest in prohibited investments may result in a tax of 50% of the value of the investment, and a 100% tax on income and capital gains from the prohibited investment. Residents of a property that the MIC currently lends funds are also not allowed to participate in the MIC.
Major Mortgage Investment Corporations in Canada
Atrium Mortgage Investment Corporation
Atrium is listed on the Toronto Stock Exchange (TSX) under the ticker symbol TSX:AI. The size of Atrium's average mortgage is $4.7 million, although it ranges from $300,000 to $30 million. Atrium holds 138 residential mortgages and 20 commercial mortgages. Of those, 73.6% of Atrium's mortgages are located in the Greater Toronto Area (GTA). As of March 3, 2021, Atrium's dividend yield was 7.01%.
MCAN Mortgage Corporation
MCAN is listed on the TSX under the ticker symbol TSX:MKP. MCAN's average LTV ratio was 61.5%, while their average mortgage term was 13.5 months. MCAN focuses on uninsured residential mortgages and residential construction loans. 53% of MCAN’s portfolio is in residential mortgages, 43% in construction loans, and 4% in commercial mortgages. MCAN originates their own mortgages through their subsidiary, XMC Mortgage Corporation.
Timbercreek Financial
Timbercreek Financial is listed on the TSX as TSX:TF. Timbercreek has a larger focus on commercial mortgages. As a result, they hold the absolute minimum required amount of residential mortgages at 50.1%. Their average LTV ratio is 68.2%, with 90.4% being first mortgages. Timbercreek passes all lender fees to investors, with Timbercreek mortgages being primarily interest-only.
Public Mortgage Investment Corporation Stats
| Atrium | MCAN | Timbercreek | |
|---|---|---|---|
| Dividend Yield | 7.01%* | 7.78%* | 7.70%* |
| Market Cap | $544 million | $434 million | $724 million |
| Residential Mortgages (% of Portfolio) | 79% | 96.3% | 50.1% |
| Commercial Mortgages (% of Portfolio) | 21% | 3.7% | 49.9% |
| First Mortgages (% of Portfolio) | 81.7% | N/A | 90.4% |
| Second and Third Mortgages (% of Portfolio) | 18.3% | N/A | 9.6% |
MIC Portfolio Geographic Distribution
| Atrium | MCAN | Timbercreek | |
|---|---|---|---|
| Ontario | 76.5% | 59.3% | 40.9% |
| British Columbia | 22.0% | 29.4% | 25.2% |
| Alberta | 1.5% | 8.3% | 15.1% |
| Quebec | 0% | 1.7% | 16.1% |
| Other Provinces | 0% | 0.5% | 2.7% |
Why invest in a MIC?
Investing in a mortgage investment corporation has some benefits compared to other methods of private mortgage investing, but there are also some downsides.
Some benefits of a MIC include:
- Mortgage investments are managed for you by professionals.
- No need to personally evict tenants
- You will receive a fixed dividend at regular periods.
- A large pool of mortgages spreads out risk.
- A pool of mortgages also mean that overlapping terms will even out returns, with less funds sitting idle.
Some downsides of a MIC include:
- MICs have operating and administrative expenses. These fees are passed down to investors in the form of a smaller dividend compared to interest received. For example, MCAN’s administrative expenses are 22% of the interest income it earns.
- Lack of control. As an investor, you do not directly choose which properties to lend money to.
Alternatives to MICs
Syndicated Mortgages
Besides MICs, another way to invest in private mortgages is through syndicated mortgages. Syndicated mortgage groups is a group of private investors that provide a mortgage to a single borrower. Investors in a syndicated group contribute towards the syndicated mortgage and will receive a return proportional to their contribution.
Some provinces require investors of private mortgages to work through a mortgage broker or agent. In those provinces, private lenders cannot advertise their private mortgages directly to the public. Only the broker that they are sourcing mortgages through can advertise on their behalf.
In most cases, a syndicated mortgage group will work through a mortgage broker. As there is no administrative overhead and since there is no middleman in this transaction, a syndicated mortgage allows investors to keep more of the interest that the borrower pays on their mortgage.
As syndicated mortgages are also on an individual level, you have control over what borrower to lend to. However, lending to a single borrower means that if they default on their mortgage, you may lose a large amount of your investment. During the foreclosure process, you will also not be earning any interest income.
Investing in a single mortgage at a time will also mean there will be downtime between when a mortgage is repaid and when a new mortgage is lent out again. This can mean that your annual returns will be lower.
Arm’s Length Mortgages
Some financial institutions allow you to use them as a middleman to service a mortgage, while you provide the capital to fund a mortgage. Canadian Western Trust Company, a subsidiary of Canadian Western Bank (CWB), offers Arm’s Length Mortgages.
CWB's Arm's Length Mortgages allow you to use a registered account, such as an RRSP or TFSA contributions, to directly invest in a selected individual mortgage. You can choose the mortgage interest rate and mortgage term length, lend to mortgages with a LTV ratio up to 90%, lend to new purchases and refinances, and lend to first, second, and third mortgages. You can only set a mortgage interest rate between 2% and 30%.