What is mortgage investing? 

It’s likely that you’re already familiar with the concept of mortgages if you’re on our site. Mortgages help homeowners afford homes and lenders make money from loaning to borrowers in exchange for interest paid on the loan. 

In a previous article on leveraged investing, we talked about how a mortgage is not only a way for you to afford a home, but can be a valuable tool to grow your wealth. But what about on the other side of the equation? 

In this article we’re going to discuss mortgages as an investment vehicle, and how you can tap into the mortgage market as an investor.

What is a mortgage investment fund?

Like many corporations, lenders often obtain the capital they use to finance their loans through investors. While it isn’t accessible to most individual investors to become a shareholder of a major bank or other lender, there are some firms that allow investors to purchase units in their mortgage fund.

Our partner Perch Capital, is one such lender that offers a mortgage investment fund which investors can buy into.

A mortgage investment fund sells units to investors at a fixed dollar amount and lends this money to qualified borrowers through a private mortgage. Similar to conventional mortgages, the borrower is responsible for repaying the loan through a monthly mortgage payment consisting of the principal and interest. Investors in a mortgage fund like Perch Capital earn a return from the interest paid by the borrower on their mortgage.

Mortgage investing can take many forms, including mortgage investment corporations (MIC), a mortgage trust or a limited partnership mortgage fund. Each of these have a slightly different structure and tax treatment, but the concept of earning a return is largely the same.

What is a private mortgage?

A private mortgage lender offers short-term (less than 1 year) mortgages to borrowers who need specialized mortgages that are unlikely to be qualified at a typical lender. Our partner, Perch Capital is an example of a private mortgage lender.

The typical borrower well suited for a private mortgage from Perch Capital has strong credit and sufficient income to make the payment, but needs additional short-term financing. Common scenarios include:

• Renovation financing for a project that will be completed in less than 6 months
• The sale of their home falling through, and a need to bridge the down payment on a purchase they’ve already committed to
• Retaining a low interest rate on an existing mortgage

While the reasons for needing short-term financing will vary, to mitigate risk, Perch Capital looks for a clear and viable exit strategy within 12 months. This means that Perch Capital only loans to borrowers it expects will have the ability to refinance their mortgage with another lender or otherwise be able to pay off the loan by the end of the term.

Who should invest in a mortgage fund?

Investing in a mortgage fund is an opportunity for capital preservation and stable income generation. If your money is sitting in a high interest savings account or GIC as excess capital, and not required for day-to-day expenses, investing in a mortgage fund could offer a higher rate of return. However, unlike a savings account or GIC where you can start with $100 or $1,000, a mortgage fund typically requires a higher minimum investment. Perch Capital for example requires a minimum $25,000 investment.

Who is not well suited to invest in a mortgage fund?

For those who require greater liquidity and immediate access to cash, a mortgage fund investment is not recommended. When you buy units in a mortgage fund like Perch Capital, these units are not traded on a stock market and are subject to resale restrictions under securities legislation. Redeeming units require advance notice and will take time to convert into cash.

What are the benefits of investing in a mortgage fund?

The most obvious advantage of investing in a mortgage fund, is the expectation that you will be able to get a profitable return on your investment. Here are some of the specific reasons as to why you would choose to invest in a mortgage fund over other investments:

• Diversify your portfolio with a high yield alternative debt investment. There is no asset price volatility, since units are bought and redeemed at the same price. Historically, mortgage fund investments have limited correlation with stocks and bonds. For example, in 2022 even while stocks and bonds were down, with Perch Capital’s mortgage fund you would’ve earned an 8% return.
• Reduce concentration risk. By investing in a mortgage fund, Perch Capital holds a portfolio of mortgages which reduces exposure to any individual borrower. Most people simply don’t have the financial capacity to do this themselves.
• Leverage deep industry expertise. Perch Capital’s mortgage fund team has extensive experience handling underwriting, servicing and mitigating defaults.

What are the risks of investing in a mortgage fund?

Of course like with most investments, there are risks that are associated with investing in a mortgage fund. The main risk with mortgages is that borrowers will default on their loans and investors will receive less than desirable returns. Most mortgage funds try to mitigate this by placing strict borrowing requirements on their customers.

Here are some drawbacks to investing in a mortgage fund:

• Lack of liquidity. Mortgage fund investing can require minimum investment periods or restrictions on redemptions. It isn’t a liquid investment that you can redeem at will. As such, it’s we recommended you  only investing excess capital.
• Influence is limited. Management will not run individual deals by you for approval. As an investor, you rely on the mortgage fund to assess and deploy capital wisely.
• No guaranteed returns. Mortgage investment funds will communicate their target yield, however the actual payout will depend on borrowers making their mortgage payments. Perch Capital mitigates this risk by fully    underwriting the deal and assessing the quality of the borrower and the property before issuing a mortgage approval.

What is Perch Capital?

Perch Capital is our mortgage investment fund partner, which offers private lending to borrowers who fit strict criteria. For more information on Perch Capital, head over to Perchcapital.ca

Disclaimer

This article should not be taken as legal, tax or investment advice. Please consult your wealth advisor, tax professional and legal professionals to confirm if investing in a mortgage fund is right for you.