Low-interest rates and low yields for traditionally “safe” investments often prompt investors to look for alternative options that can deliver more attractive returns. This was particularly the case during COVID-19 lockdowns when even long-term bonds were only delivering yields of around 1%.
Even when bonds deliver a more normal 2.5% yield, this is still not a huge return for many investors, especially during periods of high inflation. One alternative option is mortgage investments, which can bring returns closer to 10% or even higher.
There are several types of mortgage investments, but in general, they involve pooling money from a large group of investors. That pooled money is then lent to people or organizations that can’t secure a mortgage from a bank or other conventional mortgage lenders.
People with a low credit score are one example of the kind of borrowers who struggle to get a conventional mortgage and so turn to private mortgage investors to buy a home. The self-employed, new immigrants and people with income from a foreign company might also need to get a mortgage from private mortgage investors and alternative lenders.
In this article, we take a look at the different types of mortgage investing in Canada, such as mortgage investment corporations and mortgage investment funds.
We also answer typical questions about mortgage investing in Canada, such as is a mortgage an investment; what is a mortgage investment; how to invest in mortgage investment corporations; the effect of the income tax act on mortgage investment corporations; what are mortgage investment corporation risks; and how to start a mortgage investment corporation in Canada.
What are the advantages of mortgage investing in Canada?
The main advantage is the rate of return. Some private mortgage investors earn upwards of 10% in interest or yield, depending on the type of mortgage investment involved.
Typically, though, the higher the yield, the higher the risk. Some private mortgage investors lend money to one borrower; others pool their money into mortgage investment corporations or similar, which lend money to a large number of borrowers (thereby reducing the risk level).
What is a mortgage investment corporation?
Of all the options for mortgage investing in Canada, a mortgage investment corporation is one of the most popular. The Income Tax Act and mortgage investment corporations are closely linked: the Income Tax Act regulates how mortgage investment corporations function.
Mortgage investment corporations pool mortgage investment funds from a large number of investors. These funds are used to provide usually short-term loans (six months to three years) to a large number of borrowers (typically people or companies that can’t get a mortgage from a bank or conventional financial institution). This reduces the risk for default.
Income comes from the interest rate and fees charged to borrowers and is usually paid out to investors in the form of dividends (often quarterly or monthly). Management fees and operational expenses are taken out by the mortgage investment corporation before providing dividends. Dividends can range from around 6% to well over 10% in some cases.
There are mortgage investment corporations in BC, Ontario and other provinces with large metropolitan areas (and mortgage investment corporations in BC and Ontario are particularly prevalent, given the size and value of the real estate markets in those provinces).
Mortgage investment corporations are considered public companies, so their shares can be held in registered accounts, such as RRSPs and TFSAs. And another advantage of mortgage investment corporations is that they don’t pay income tax, so all of their earnings (less fees and expenses) can be paid out to investors.
Mortgage investment corporation rules
There are several rules, as per the Income Tax Act, that mortgage investment corporations have to follow. These include:
- There must be at least 20 shareholders.
- No single shareholder can own more than 25% of shares.
- Loans must be on property within Canada.
- Loans can only be given to Canadian residents.
How to invest in a mortgage investment corporation
Participating in mortgage investment funds can be complex, especially for beginners. You would need to invest either through a mortgage broker or a registered securities dealer that is licensed with the FSCO. Be sure to look up the list of registered advisors.
You should also discuss your plans with a financial advisor who has no connection to the mortgage investment corporation, so you receive unbiased advice before making your decision.
Make sure that the investment company or mortgage broker explains how the investment works, as well as all of the risks involved. Don’t sign until you fully understand what you’re investing in and unless your financial advisor considers it to be a wise choice for your circumstances.
Mortgage investment corporation risks
Most investment opportunities come with some kind of risk, particularly those that offer high returns. The risks also depend on the kind of mortgage investment fund you’re interested in.
Investing in a mortgage investment corporation is less risky than lending to just one or two mortgage borrowers, as risk is spread over many lenders and many borrowers. There are still some risks involved, however, such as:
- Borrowers with lower credit scores or self-employed income could be more likely to miss mortgage payments or default.
- If the property value of a defaulting borrower drops substantially, you may struggle to recoup all of your money.
- Your money can be tied up for some time, so it is best not to invest in these if you need to easily access the money.
Other options for mortgage investing in Canada
There are several other mortgage investment fund options, apart from mortgage investment corporations. These include:
Public mortgage funds: these are traded on public stock exchanges and can be easily bought and sold. They consist of a pool of properties that produce income.
Private mortgage funds: these are similar to public mortgage funds except that they are not traded on exchanges. Private mortgage funds often provide higher returns but risks can be higher and your money can be locked in for long periods of time.
Mortgage syndicates: these are for more experienced mortgage investors. They involve several investors directly funding a mortgage, with each member of the syndicate having a partial interest in the mortgage. The risks can be higher than a public mortgage fund.
Mortgage investment FAQs
What is a mortgage investment vs. an investment mortgage?
An investment mortgage is when you buy a property using a mortgage specifically to rent it out and become a landlord. The main problem with an investment mortgage is that it can be riskier, given that you only have one or two tenants, who could stop paying rent and become a problem for you. Having an investment mortgage and being a landlord also requires a lot of work. Other mortgage investment options don’t involve you becoming a landlord.
How to invest in mortgage investment corporations?
The easiest way to do this is to go through an investment advisor or a mortgage broker who specializes in this type of investment.
How to start a mortgage investment corporation in Canada?
This can be extremely complicated and is typically the reserve of investment advisors and mortgage brokers. You would need to create a corporation with the help of a lawyer, then appoint directors and officers and establish a registered head office. You would also have to comply with all of the rules as laid out in the Income Tax Act.
Are mortgage investment corporations safe investments?
As with any speculative investment opportunity, there are risks that you could lose some of your money (as outlined in the section above on potential risks).
Are mortgage investment corporations taxed?
Not so long as their profits are all given out to their shareholders. Those shareholders are each individually responsible for tax payments.
Using a reverse mortgage for investments
Homeowners aged 55-plus can take out a reverse mortgage for up to 55% of the appraised value of their home. With a reverse mortgage, you don’t have to make any regular monthly mortgage payments; in fact, you only pay back what you owe plus any accrued interest when you move out or sell your home.
The tax-free proceeds of a CHIP Reverse Mortgage from HomeEquity Bank can be used for any purpose at all — including for mortgage investments.
Call us today at 1-866-758-2447 to find out how much you could borrow with a reverse mortgage.