Mortgage Investment Corporations (MICs): An Overview

Mortgage Investment Corporations (MICs) are Canadian investment vehicles that pool funds from investors to lend out mortgages, primarily in the residential real estate sector. They offer an alternative investment opportunity, especially attractive in a low-interest-rate environment.

How MICs Work

MICs operate under the Income Tax Act and must adhere to specific rules. These regulations include distributing 100% of their taxable income to shareholders annually. This distribution is typically in the form of dividends, making MICs an income-focused investment.

The funds raised from investors are used to originate or purchase mortgages. MICs often focus on mortgage types that traditional banks and credit unions might avoid, such as short-term mortgages, bridge financing, construction loans, and mortgages for borrowers who might not meet conventional lending criteria.

Investment Characteristics

• Income Generation: MICs are designed to generate consistent income for investors through mortgage interest payments. The mandated income distribution leads to predictable returns.
• Diversification: A single MIC typically holds a portfolio of numerous mortgages, providing diversification and reducing the risk associated with any one particular loan.
• Higher Yields: Due to the nature of the mortgages they hold (e.g., higher-risk, shorter-term), MICs often offer higher yields than traditional fixed-income investments like government bonds.
• Regulation: While MICs are subject to corporate governance and regulatory oversight, they are not insured by the Canada Deposit Insurance Corporation (CDIC). This is a crucial distinction from investing in a bank.

Risk Factors

Investing in MICs involves certain risks:

• Mortgage Default Risk: Borrowers may default on their mortgage payments, leading to potential losses for the MIC. The quality of the MIC's underwriting process is critical to mitigating this risk.
• Interest Rate Risk: Rising interest rates can negatively impact the value of the mortgages held by the MIC. However, shorter-term mortgages can help to mitigate this risk.
• Liquidity Risk: Depending on the MIC's structure, your investment may not be easily liquidated. Some MICs have redemption restrictions.
• Management Risk: The success of a MIC depends heavily on the skill and experience of its management team in selecting, underwriting, and managing mortgages.

Who Should Invest?

MICs can be suitable for investors seeking higher income and are comfortable with a moderate level of risk. They are often included in a diversified investment portfolio. It's essential to conduct thorough due diligence, review the MIC's offering documents, and understand the risks involved before investing. Consulting with a financial advisor is highly recommended.