What is a mortgage investment corporation? Is it safe to invest in this? How can you start one?
A mortgage investment corporation, or MIC, is a company that lends mortgages in Canada. If you own shares in a MIC, you can invest your money in a company that manages a secured and diversified pool or mortgages. MIC shares are investments qualified under the Income Tax Act of Canada for RESPs, RRIFs, TFSAs, or RDSPs.
Typically, MICs are provincially licensed and registered, while the management of the mortgage fund is under the purview of real estate agents and mortgage brokers. Here is what you need to know about MICs, from how to establish one to the benefits and risks.
What is a mortgage investment corporation?
Mortgage investment corporations, or MICs, are organizations that process investments and mortgage applications in Canada. MICs offer secured shares of qualified and diversified mortgage plans to investors that are based on the Income Tax Act of Canada. Essentially, MICs gather pools of investors and lend funds in the form of mortgages.
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This is also known as a mortgage investment fund. These funds are secured against real estate for borrowers who do not otherwise qualify for financing from conventional banks. In this arrangement, borrowers usually pay higher interest rates than they would with a larger lender or traditional bank. And to lower the monthly payment amount, these investment funds often allow for interest-only payments. Each investor in this fund earns back money on their investment from fees paid by the borrowers on their mortgages, and interest.
Entities involved in a MIC
So how does the process work? How is it structured? The three entities involved in a MIC include:
- The corporation. Investors buy shares (at a fixed dollar amount) of the MIC, which then lends the money to mortgage borrowers.
- The borrowers. Anyone who borrows money from a MIC only gets the money following the mortgage approval. The borrower then makes each monthly mortgage payment, as well as the principal loan amount and the interest (or loan cost).
- The investors. Generally, investors can grow their money by investing shares—often designed for long- or short-term investment periods—with the MIC. For higher yields, investors can choose long-term periods. In that case, interest payments usually produce profit.
Three entities comprise a MIC: the corporation, the borrowers who receive money from the MIC, and investors who invest shares in the MIC.
The benefits and the risks
A mortgage investment corporation provides:
- lower interest rates
- customizable loans
- better security for homebuyers
This better security specifically helps homebuyers who have had their mortgage applications rejected by traditional banks, alternative loan providers, credit unions, or other more traditional financial institutions.
When investing in a MIC, there is also a greater potential for growth. For instance, alternative investments were slated to grow to $14 trillion in 2020, according to PWC Canada—and a major portion of that growth was to come from the real estate and mortgage sectors.
Benefits of a MIC
So, beyond the obvious, what are some of the major benefits of a MIC?
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Security. In other words, investing in a MIC is a secure way to grow your money. Assets such as personal guarantees and insurance policies are utilized to provide security, while real assets are utilized to secure mortgages.
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Network. A network of industry experts, with a strong mortgage-lending background, can provide first-hand knowledge and critical information. Your investment portfolio will be strengthened thanks to their far-reaching experiences with a wide range of investment scenarios.
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Portfolio. Investors place their money in a broad pool of mortgages in a portfolio investment, which means that when the investor diversifies, they can better maximize their returns and manage their risk levels. Essentially, the MIC manages every mortgage plan efficiently for higher returns, i.e., to grow the investors’ money.
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Tax benefits. Under the Income Tax Act of Canada, the MIC benefits from preferential tax treatment, thanks to capital gains and cash inflows qualifying as tax-free. Since it limits double taxation—especially if an organization gets interests in income—this is great for shareholders.
The major benefits of a MIC are the security they offer, the network of industry experts at your disposal, the diversified portfolios they offer, and the tax benefits.
Risks of a MIC
On the other hand, however, there are risks that come with a MIC. It is always critical if you do decide to invest, that you weigh the benefits and the risks. Here are a few possible risks investors should look out for:
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Uncertainty. The quality of credit of people who want mortgage loans is usually uncertain. It should be noted, however, that a MIC usually manages this type of risk by putting borrowers through thorough background checks.
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Market fluctuations. Fluctuations in property prices could impact the value of the homes being used as loan collateral. Drops in value usually have a negative impact on a MIC.
It is even possible that a MIC in this situation will fail to recover the money needed to secure the mortgage loan. These housing market fluctuations also have the potential to impact profitability.
How to establish a MIC
Established in 1973, mortgage investment corporations bring like-minded investors together to invest in mortgages. While buying a mortgage is usually too costly for most investors, a MIC will lessen any risk and help diversify an investment portfolio.
Put simply, MICs allow several investors to invest in multiple mortgages, which also spreads the risk out among members. Another purpose of a MIC is to give out returns to each investor minus any withholdings.
To establish a MIC, you should first create a corporation, which you can do yourself or through a lawyer online, through an approved service provider. The next step is to then create some organization, such as appointing officers and directors as well as registering a head office and establishing a bylaw.
Guidelines to establish a MIC
If you want your MIC to be considered under the Tax Act of Canada, you must follow these guidelines:
- The MIC must be Canadian.
- The MIC can only invest in mortgages that are secured against real estate located in Canada.
- It cannot develop the property or manage it.
- There must be 20 shareholders minimum, and no shareholder can own over 25% of the shares issued of any class of sharers in the MIC.
- Half of the property of the MIC at minimum must be in mortgages secured on properties, deposits, and cash.
- Debt is within the limit set out in the Income Tax Act.
To establish a MIC, some key things to remember are that the MIC must be Canadian, and the real estate must be in Canada. Remember: the MIC itself cannot develop or manage the property. There must be at least 20 shareholders and no shareholder can own more than 25% of the shares.
Who can invest in a MIC?
It depends. There are strict rules in Ontario, for instance, around soliciting others to invest in MICs and other similar ventures. Raising funds in public markets is much more expensive than raising funds in the private markets since you do not have to prepare and file an offering document, such as a prospectus, with the Ontario Securities Commission. The private issuer exemption is typically the more common way that companies organize and draw early investors.
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Private issuer exemption guidelines for mortgage investment corporations
If you want to utilize the private issuer exemption, you must follow these guidelines:
- You must include a provision that shareholders cannot trade shares without the board’s consent.
- Excluding employees of the MIC, you cannot have more than 50 shareholders.
- All those shareholders must have an established relationship with the MIC, including an accredited investor, a spouse, an employee, a family member, a friend, or a business associate of the corporation’s founder.
After the MIC passes the threshold of 50 shareholders, it is subject to reporting obligations around raising capital. At that point, it is necessary to seek legal advice.
Have experience with a mortgage investment corporation? Let us know in the comment section below.
