According to the Canadian Securities Administration investor index, roughly half of investors surveyed indicated that they DIY invest (CSA, 2024), a number that has steadily increased over the years. This trend reflects a growing preference among investors to manage their own portfolios, seeking to earn, learn and gain more control over their investments. However, many investors struggle with the complexity and volatility of the stock market, often leading to costly mistakes or disappointing results. Compounding this issue, persistent inflation eliminates most of the return generated by GICs and High-yield savings accounts, making many investors seek alternative investment options to achieve their financial goals. Private mortgage investments offer a solution, combining the security of tangible assets and competitive yields. But what is mortgage investing- and how do you begin?
Understanding mortgage investing
Mortgage investing involves lending money against secured real estate properties. Borrowers use these funds to acquire, construct or refinance properties, and as a lender (investor), you receive interest payments in return. The most appealing feature of mortgage investments is the security provided by the underlying real estate asset you are lending against, which acts as collateral against any failure of payments from the borrowers.
There are many ways to participate in mortgage investing and private lending. We have summarized them in three high-level categories:
- Direct Mortgage Lending:
This method of investing involves an investor lending directly to borrowers. While this approach can yield higher returns and typically offers the lender (investor) a higher level of control over the loan, it requires a high level of sophistication, extensive due diligence, and more hands-on management. Loans are also more challenging to source, especially good ones. This raises the barrier to entry, making it unsuitable for most retail investors and more suitable for institutional and highly sophisticated investors. - Mortgage Syndication:
Syndication lending is a form of direct lending where multiple lenders (investors) pool their funds to invest in a single mortgage. This form of investing is very popular among sophisticated retail and institutional investors, as it spreads the lending risk over multiple investors. The deals are usually facilitated through a mortgage broker or mortgage administrator and typically have an order of repayment built into the contract. This form of lending lowers the effect of a default on individual investors compared to the default risk associated with direct lending. However, due to the lack of liquidity, diversification, and repayment guarantees, syndicating into a loan is classified as a high-risk investment and may not be a suitable investment for the average investor. If you are interested in syndication, we advise you to visit the Financial Services Regulatory Authority of Ontario’s website (FSRA) here to learn more and know what to look for. - Mortgage Income Funds and Mortgage Income Corporations:
Mortgage income funds and Mortgage Income Corporations (MIFs and MICs) pool investors’ funds and invest them in a portfolio of managed mortgages. This structure provides many investors with stability, diversification and exposure to the real estate market with minimum personal intervention as professionals manage and operate these pooled funds. This makes investing in mortgages accessible even for those who don’t have specialized knowledge—appealing to retail investors of different levels of sophistication.
| Mortgage Investment Type/Features | Direct Lending | Mortgage Syndication | MIFs and MICs |
|---|---|---|---|
|
Diversification |
Low |
Medium |
High |
|
MIFs/MICs spread risk across multiple mortgages, while direct lending and syndicated loans concentrate risk in one or few deals. |
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|
Risk Management |
DIY |
Partial |
Professional |
|
MIFs/MICs rely on professional managers; direct lending and syndicated lending require oversight by the investors. |
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|
Return Stability |
Moderate |
Moderate |
Consistent |
|
MIFs/MICs aim for steady interest-based returns; the returns of direct lending and syndicated loans fluctuate based on the individual loans. |
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|
Administrative Requirements |
High |
Moderate |
Low |
|
MIFs/MICs require little to no investor administration, while direct lending and mortgage syndication require individual administration and compliance reporting. |
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|
Liquidity |
Limited |
Limited |
Moderate |
|
MIFs/MICs have a redemption policy that outlines how the investment can be redeemed. The redemption policy can vary between vehicles. Direct lending and syndicated loans are typically tied up capital until the loan matures and/or when the borrower can repay the loan. |
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|
Security |
Single-Asset |
Single-Asset |
Multi-Asset |
|
MIFs/MICs secure their loans against multiple properties, enhancing collateral strength. Direct lending and syndicated loans depend on a single asset, increasing vulnerability. |
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The Bottom Line:
Investing in mortgages is a strategy that combines the security of real estate with the earning potential of a high-yield, fixed-income product. As with any other investment, there is always risk involved. However, whether you are a sophisticated mortgage investor, or this is your first time learning about mortgage investing, Mortgage Income Funds can be an excellent option for your portfolio. If you’re ready to explore mortgage investing and want to know how it can fit into your financial strategy, contact our team of representatives for a personalized consultation. Discover how Mortgage Income Funds can help you achieve steady returns while managing risk effectively. Contact us today and follow us on social media to stay informed!
References:
Canadian Securities Administrators. (2024). Investor index reveals Canada’s shifting investment landscape. Retrieved from https://www.securities-administrators.ca/news/2024-investor-index-reveals-canadas-shifting-investment-landscape
Financial Services Regulatory Authority of Ontario. (n.d.). Investing in a syndicated mortgage. https://www.fsrao.ca/consumers/mortgage-brokering/investing-syndicated-mortgage
