The basics of a Mortgage Investment Corporation (MIC)

Building equity through homeownership, and the ability to leverage that equity to invest, has been a great retirement strategy for many. The key is knowing what to invest in. Using leverage to purchase assets that return more than your cost of borrowing is great, except when they don’t return more than your cost of borrowing. This makes assets like securities and index funds potentially risky as they come with a non-negligible amount of volatility. Investing in a mortgage fund is another potential avenue for deploying your capital, and one that many miss out on due to lack of knowledge. The most common kind of mortgage investment fund is a MIC. Our partner fund Perch Capital MIC is a mortgage investment corporation (MIC), and offers shares to clients which can be held in registered tax-advantaged accounts like a TFSA.

In this article, let’s explore the basics of a mortgage investment corporation (also known as a MIC, pronounced as “mick”), beginning with a definition.

What is a Mortgage Investment Corporation (MIC)?

A mortgage investment corporation or MIC for short, is a company that pools investors’ capital to lend to mortgage borrowers and generate a return on that capital. 

A MIC works similarly to any mortgage lender, lending capital to borrowers to generate income. This is the same model employed by any lender, including banks. The goal is that they can borrow money from investors and then lend it out at a higher rate to make a spread on the capital. Unlike banks, MICs are not regulated by OSFI and things like the stress test don’t apply to them. For this reason, they offer different lending products than that of a traditional lender. 

A MIC is restricted to lending on Canadian properties, but these can be residential, commercial, or any other eligible asset class.

How does a MIC work?

Similar to other investment funds, a MIC works by pooling capital from investors, generating income which is distributed to investors, and earning a fee in return for this service. A MIC will only be successful if it is generating returns for its investors.

Another asset that has some similarities with a MIC is a REIT or real estate investment trust. However, unlike REITs, MICs can have up to 25% of their assets as direct property ownership, and as a result aren’t as exposed to real estate market price fluctuations. Perch Capital has no direct property ownership and strictly holds mortgage assets.

A typical MIC sells shares to investors at a fixed dollar amount and lends the capital raised from investors to qualified borrowers through a private mortgage. Similar to conventional mortgages, the borrower is responsible for repaying the loan through a regular mortgage payments.

History of MICs

MICs began in Canada in 1973 as part of the Residential Mortgage Financing Act. They saw success due to the rapidly growing need for mortgage financing following population growth within the country. Today, rsing interest rates and tougher qualifying standards all lead to more demand from Canadians for alternative lending solutions.  The Perch Capital team estimates that the private mortgage market in Canada is $30 billion.

MICs are governed by the federal Income Tax Act and will also have provincial bodies that regulate it directly or indirectly. Typically, there is a mortgage regulatory body (in Ontario, this is FSRA) in each province that will oversee the lending component and protect borrowers and there is a securities regulatory body (in Ontario, this is the OSC) that oversees the investment aspect and protects investors.

How does a MIC differ from other mortgage investment options?

Under the Canadian Canadian Income Tax Act, There are a number of requirements that must be fulfilled for a mortgage fund to become a MIC.

These include:

– All MIC investments must be in Canada- A MIC must have a minimum of 20 shareholders, with no shareholder owning more than 25% of the shares- A MIC cannot manage or develop properties

– A MIC can’t have more than 25% of its assets in property holdings

– A MIC is limited to how much debt it can borrow in the fund relative to the amount of share capital it has raised from investors

Becoming a MIC comes with a number of advantages over other mortgage investment firms.

Primarily, being a MIC allows investors to hold shares of Perch Capital within registered tax-advantaged investment accounts such as a TFSA or an RRSP.

Another way to invest in mortgages is directly or through an administrator (this effectively is someone who connects investors with deals). This  can be considerably riskier since you are fully exposed to individual mortgages, leading to a portfolio that isn’t diversified enough as most investors don’t have enough capital to fund more than a few mortgages (mortgages can range from $50,000 to over $1,000,000 each) . If the few mortgages in that investor’s portfolio default, then they need to enforce their rights themselves (which can be a drain on resources) and that investor potentially would realize losses if they aren’t able to recoup their capital after the liquidation process. 

Investing in shares of a MIC requires less capital and protects investors from many of the risks involved with direct private mortgage lending. Since a MIC lends to many borrowers and pools capital, investors own a small share of a basket of mortgages versus owning a lot of one. This would be a similar approach to why many investors buy an index fund (ex: S&P500) instead of buying 1-2 stocks in their entire portfolio. Additionally, a MIC has the expertise and the resources to handle liquidation if it comes to that, which can make a massive difference as it relates to the ability to maximize liquidation proceeds and minimize the risk of losses.

Who would benefit from investing in a MIC?

Most investors don’t have the capital needed to safely invest in a diversified portfolio of private mortgages directly. A MIC allows smaller retail investors to get access to mortgage investing through a registered security which can be held in a tax-advantaged investment account.

MICs are ideal for investors looking for income generating assets with a low to medium risk tolerance. If you have capital not required for day-to-day expenses, investing in a MIC could offer a higher rate of return than other investments like a GIC or high interest savings account. A MIC allows investors to diversify their with an income generating asset that has minimal asset price volatility, and investing in Perch Capital allows you to leverage our deep industry expertise. Perch Capital’s team has extensive experience handling underwriting, servicing, and mitigating defaults.