Frequently asked questions
Mortgage investing is not commonly known by retail investors. Read more of our frequently asked questions or reach out today to speak with a finance professional.
Mortgage Investing - what you need to know.
A mortgage income fund is an investment vehicle that pools money from investors to invest in various privately issued mortgages. As a fund manager, Morrison Financial will assess hundreds of loan opportunities and select the best few that fit our investment policy to be included in our portfolio. The monthly payments we receive from the loan portfolio are processed by the fund manager and passed on to the investors in the form of monthly distributions. This flow-through of mortgage payments is designed to provide investors a relatively predictable and consistent monthly income secured by real estate.
By investing into mortgages secured by real estate in Canada, you obtain many advantages that may not be available to traditional equity market investments.
- Predictable cash flow: A well structured and managed mortgage income fund can offer you a predictable income stream. This predictability is excellent for those that are looking for a passive income stream that is, through many industry cycles, reasonably reliable.
- Strong returns: As compared with traditional fixed income investments like bonds or GICs, mortgage investment yields tend to be higher. When compared with a bond of equivalent yield, we believe we can offer a similar return, with significantly lower volatility.
- Diversification: Real estate is a meaningful component of any investment portfolio. By investing into private mortgage loans, you are taking the next step in diversifying your investment portfolio and lowering correlations with the public markets.
Absolutely. Much like a rental condo or investment property, our goal is to provide our unitholders with a consistent, monthly income. For many of our investors, this income is reinvested towards a savings goal, for others they take the monthly distribution as cash to help supplement their other sources of income. Some of the benefits of the Mortgage Income Funds over a traditional rental property would be that you don’t have to find tenants, make renovations or updates to the property, and you’d have a more diversified investment as we have multiple loans, over multiple geographies, with multiple borrowers at any one time.
Mortgage lending is one of the oldest forms of investment. Mortgages originated in England when landowners did not have the economic resources to acquire land in one single transaction. At this time, buyers would get loans directly from the vendor of the property. By the 1900s mortgages as we understand them today came to be and the business has been largely institutionalized. By participating in a mortgage income fund you are investing directly into real estate in Canada and opportunities which are not publicly available to investors to earn a targeted premium risk adjusted return.
Unlike stocks and bonds, many alternative investment products are privately issued and do not trade on a public market. This is also the case for our Mortgage Income Funds. The benefit to this approach is that the underlying value of the mortgage fund is expected to stay constant and not affected by market’s trading activities. Much like the value of your own home, we do not have external parties changing the bid/ask offering every second of the day.
An exempt market security is a security issued in Canada that falls under the National Instrument 45-106. By investing into our mortgage income fund, you are investing into an exempt market security. These securities are exempt from prospectus requirements and hence require less disclosure than a prospectus offering. To sell a security in the exempt market, an issuer must ensure that the investor qualifies under a specific exemption, with common exemptions including:
- Issue an offering memorandum
- Sell to accredited investors
- Sell to family, friends and business associates
- Or sell a minimum of $150,000 per transaction (not available to personal investments)
By investing into the Morrison Financial mortgage income funds, you are investing into an exempt market security.
Major fees of companies that pool capital to invest into mortgages are management fees and loan origination fees.
- Management fees: are generally 1.0% – 2.5% p.a. – the fee can be tied to Net Asset Value (NAV), investors’ capital, or investors’ capital plus debt. The best structure, we believe, is to tie fees to NAV as NAV reflects the health / performance of a portfolio. If there are no defaults, the NAV of a mortgage income fund should ideally be the same as the original value as all the excess cash flows generated each year are distributed to investors.
- Loan origination fees: are geneerally 1% – 3% of the loan amount. Managers might either keep this amount for themselves, or pass a portion of it to the fund. At Morrison Financial, a portion of this fee is passed to the funds.
- Experienced management team – Look for teams that have a long track record. Morrison Financial was founded in 1987 and is one of the longest standing private finance institutions in Canada. There is NO substitute for a track record of successful investments and a strong operational team. You are investing in the people of the organization and it is important to know who you are trusting your hard earned money with.
- Clear investment philosophy – Morrison Financial has clearly defined our investment philosophy in a lengthy investment policy document available for review upon request. This document goes into detail surrounding how the funds should be diversified, to whom we can make mortgages, and under what terms. Because this is a somewhat complicated business, investment premises change depending on the asset type and the market. From time to time our investment policies are updated to account for the ever changing real estate market.
- Tax efficient structure – Tax can have a major effect on your returns. Morrison Financial takes all reasonable steps to manage the tax obligations. An example of this would be using your RRSP or TFSA to hold units of the funds.
- Audited financial statements – Morrison Financial provides audited financial statements to its investors as completed by a reputable third-party auditing firm. To read more on who audits our funds, please reach out to our investment representative to discuss. If you are considering investing in a firm and audited financials are not available, you should consider this to be a red flag.
- Regular operational reporting – At Morrison Financial, we believe in transparency. For this reason we provide monthly updates on fund status, recent loan fundings, and reporting of income. By keeping you, the investor, engaged in the investments the fund is making we prevent surprises from coming about.
- Clearly defined hold period – Make sure that the hold period is clearly defined and cannot be arbitrarily changed or extended by the management team. You need to know how long your investment will be committed and exactly when you can expect repayment.
More questions? Please reach out to a member of our investor relations team today.
If you are an accredited investor, eligible investor, or non-eligible investor (subject to certain limitations), you can invest in the mortgage income funds. These funds are also eligible to be held within certain Registered Accounts like a TFSA or RRSP.
In Canada, an “Accredited Investor” is defined by the provincial securities commissions throughout the country. For Ontario residents for example, an “Accredited Investor” is defined in OSC Rule 45-501. This definition includes, but is not limited to:
- certain institutional investors and
- an individual who beneficially owns, or who together with a spouse beneficially own, financial assets having an aggregate realizable value that, before taxes but net of any related liabilities, exceeds $1,000,000; or
- an individual whose net income before taxes exceeded $200,000 in each of the two most recent years or whose net income before taxes combined with that of a spouse exceeded $300,000 in each of those years and who, in either case, has a reasonable expectation of exceeding the same net income level in the current year.
The short answer, no. We allow investment of eligible investors and non-eligible investors, however, those that fall into these categories will have limits on how much they can invest in exempt market products in a calendar year. Please speak to one of our dealing representatives to learn more.
About our Mortgage Income Funds
- We have over thirty years of successful lending and investing experience.
- We invest, and always have invested, right alongside our clients.
- We focus on lending only in key metropolitan areas in Ontario. We like to remain “close to home”. This allows us to visit our projects regularly and stay up to date on their progress.
- We employ a rigorous underwriting process that has been continuously refined over the past thirty years. We don’t just ask borrowers to fill out a form and then send them a loan; we spend months inspecting the details, examining comparable projects, obtaining third-party valuations to help corroborate our own calculations, and working through the minutia.
- We work alongside the borrower for the duration of the project – we don’t just write a cheque on day one and then revisit the site at the end. We do multiple site visits, ensuring the project is on track and within budget. We also do multiple draws on the loan, ensuring that we’re not over-committing our investors’ capital.
- We ensure third-party oversight from established partners for every aspect of our business operations. This ensures continual excellence and regulatory supervision in everything we do. Some examples of companies we work with would be: Meridian Credit Union for Condocorp Financing; Belco Private Capital for Compliance and Investor Relations; SGGG Fund Services for our Fund Administration; Scotiabank for Line of Credit & Business Services; Questrade and Olympia Trust for housing our Registered Accounts (TFSAs and RRSPs).
The fund’s targeted annual returns are 6-7% for the Senior Fund and 8-9% for the Junior Fund. Every month, the fund earns interest on the loans we have issued. The interest is paid to Morrison Financial, which then processes and send distributions to the investors. The annual return is a cumulative yield for 12 months of earned income.
For us, fee transparency and openness are part of our ongoing promise to deliver best-in-class client services. At the end of the day, the more we take in fees, the less we all earn in investment income. For that reason:
- We don’t charge any account opening/closing fees;
- We don’t charge any form of sales commission when you buy;
- We don’t charge any form of Trading Expense Ratio (TER);
- We don’t charge “account minimum” fees which are often a result of holding a smaller investment – conversely, your fees aren’t lower if you invest more. We’re all in this together, both large and small investors
Morrison Financial earns an ongoing Management Fee (MER); the structure of this fee is clearly articulated in our Offering Memorandum. All performance figures and target returns are calculated after our management fee has been taken – or “net of management fees”.
You can get started today with $25,000.
Yes, we do. At present, we can take registered investments through Questrade or Olympia Trust. These include TFSAs, RRSPs, RESPs, RIFs, LIFs, etc.
Registered accounts, like TFSAs, RRSPs, and RESPs are fantastic resources for financial planning. Morrison Financial is eligible to be held within these various registered accounts and can help mitigate some of the tax implications that Canadian investors face.
As an entity, Morrison Financial doesn’t invest in the mortgages that are in the funds. That being said, employees of Morrison Financial are some of the firm’s largest investors in the loans.
We pay our distribution to our unitholders once a month – on or around the 21st – these can either be paid directly into your bank account or reinvested back into the fund.
Absolutely you can!
Under Section 130.1 of the Income Tax Act, taxable distributions paid to shareholders are taxed as interest income.
As a tool in your financial planning arsenal, Morrison Financial can help you save for retirement, and help fund some of your living expenses in retirement. Here is a brief example using some assumptions:
- An initial investment of $150,000 plus an annual investment of $25,000 at an annualized interest rate of 7.5% will be worth $1,126,842.61 after 15 years when compounded monthly
- Upon retirement, this $1,126,842.61 can be switched from ‘reinvestment’ to ‘cash’ distributions, and could provide you with an annual income of $84,513 or $7,042 per month using the same interest rate of 7.5%
Note that none of these calculations assume any taxes, please consult a tax expert before making investment decisions
At present, we’re targeting an allowance for doubtful accounts (or AFDA) of 0.25% of our total loan receivable balance. There are no losses in the funds to date.
We have investment policy in place to ensure that the funds are well diversified by not being overexposed to a single borrower, project, asset class, and location.
At present, the funds do not utilize a leverage facility. That’s not to say we wouldn’t consider it, but we do not use one at present. Unlike equity or fixed income hedge funds, we wouldn’t utilize high amounts of leverage – these funds often use 3:1 or 5:1 leverage ratios to help improve their returns. Our mortgage funds would use 1:1, or similar.
At the end of each month, with thirty days written notice, we allow redemptions subject to certain restrictions. This is also clearly articulated in our Offering Memorandum, but we’d also be happy to explain it to you personally.
This investment is designed to be a medium to long term investment. We charge a two percent early redemption fee for any redemption within the first year. After this initial year, there is no penalty for a redemption.
Every month, we circulate our “monthly mailer”, which shares any important news or updates and will also include a “featured deal” – this would be an example of a loan we’ve just funded, or one we’ve funded in the past but would still be representative of the types of loans we do. Additionally, you can follow us on social media for ongoing updates.
Management and oversight of the funds
The main difference between Morrison Financial handling the mortgage portfolio and you handling it yourself would be diversification. Any investor could lend a friend a few thousand and charge an interest rate as compensation. To have access to multiple loans at any one time and the diversification benefits that come from that, that’s something which we can offer that you couldn’t handle yourself.
On top of that, Morrison Financial has developed a very good name for itself over the past thirty five years. Because of that, we see hundreds of new deals every year – and only the best of these make it into our mortgage income funds. On average, we see two or three mortgage proposals every day. For one reason or another, the vast majority of these never make it into the funds. This level of analysis, expertise, and experience, is what separates us from the individual investor who might sign a single, private loan and try to do it themselves.
In the unlikely situation that a mortgage defaults, Morrison Financial will also leverage our expertise to manage such mortgage to resolution.
From a governing oversight perspective, Morrison Financial is subject to oversight from FSRA (Financial Services Regulatory Authority). We work with third-party companies including a fund administrator, an exempt market dealer, and an accounting firm to ensure that we are in compliance with the regulations. The exempt market dealer is subject to oversight from the OSC (Ontario Securities Commission).
We have engaged Belco Private Capital Inc. as our Exempt Market Dealer. Belco provides a suite of compliance services designed to provide additional protections to investors. Our Investor Relations (IR) team members, at Morrison Financial, are also registered dealing representatives with Belco. Before you invest, someone from our IR team will speak with you to answer your questions about Morrison Financial and provide information about the risks and conflicts associated with this investment, collect know-your-client (KYC) information from you, and assess whether this investment is suitable for you. Members of our IR team will be acting in their capacity as Belco dealing representatives when they carry out these tasks.
There are a vast number of factors which go into the analysis of a loan. We would always examine the geographic location, the history of the borrower, the credit worthiness of the borrower and their business, the viability of a project, the complexity of the project, the pricing structure of the project, and the current competitors in the space.
Once we’ve agreed that we’re comfortable with these different factors, we like to analyze the financials and timelines of the project – we verify these numbers with third parties – and then move forward to funding.
To closely monitor the loans, we like to visit our projects as much as possible, We also value the importance of being close to major metropolitan centers for liquidity purposes. For that reason, we always try to write mortgages within a four-hour drive from Toronto.
We primarily focus on residential properties. Such properties can be further categorized into more asset classes which are: Land for Redevelopment, Single Family Home Purchase / Refinance, Single Family Home Construction / Renovation, and Multi-Family Development.
We issue loans anywhere from a few months to thirty-two months. Our average loan term is eighteen months.
Loan-to-value (LTV) is a measure of a lender’s exposure to the underlying asset. If a property is valued at $1m and a mortgage is written for $800k, the borrower has accessed the project as having an 80% LTV. Conversely, when you want to buy a house, the bank would ideally like for you to put 20% down – this, therefore, means the mortgage would be at 80% LTV.
We don’t have a target for the LTV of the portfolios – what we set instead, are maximum values. In the Senior Fund, which is the most conservative of the two mandates, the maximum LTV is 70%. In the Junior Fund, the maximum LTV is 85%.
We have a team in house who handles the day-to-day mortgage portfolio. Most of our team have decades of experience with private financing and this, we know, is an incredible asset to the company. At any one time as well, we have a long list of third party professionals who help validate, quantify, monitor, and oversee the many different aspects of property development and mortgage financing.
First, we have to define the term “default”. In the lending world, a default occurs when the borrower deviates from the agreed business plan (e.g. timeline, exit strategy). Defaulting doesn’t result in a loss.
Under a default, assuming that the Loan remains secure, we will work alongside the borrower to find an amicable solution, which can be restructuring the Loan, employing a new management team, or finding new source of financing. As a last resort, Morrison Financial will enforce on the Loan and look for an exit to return 100% of our invested capital.
In the past thirty-five years, Morrison Financial has had three defaulted projects; in no case has it resulted in a loss to investors. At present, we have zero defaults in the Mortgage Income Funds.
There are a plethora of reasons why a construction loan might not be funded by a traditional lender – for this reason, secondary lenders – like us – have been able to thrive in Toronto over the last thirty years. Our borrowers are always experienced developers who have structure, professionalism, and a successful track record.
Mortgages are divided between the two funds mostly by their risk rating. Internally, we calculate risk from a number of different factors; it’s not always about Loan-To-Value (LTV). Often, we would hold land development and second mortgages in the Junior Fund.
How mortgage investing compares with other forms of investment
No, we do not pay an eligible dividend to our unit holders; as a Mortgage Investment Fund, we pay our unitholders a monthly distribution. This flow-through of mortgage payments is designed to provide investors a stable, monthly income secured by the underlying real estate.
Investors can pool money to invest as equity for real estate development projects. The pooled fund can be used to purchase a land for redevelopment, bring the land through city approval process, and/or construct a condominium, townhouse complex, etc. Such projects tend to have a time horizon of 5 to 10 years
When investing in a real estate development, investors will realize their return once the project is completed and debt obligation is fully repaid. If the project is successful, the return on investment tends to be high. However, if the project is unsuccessful, the principal investment may be at risk.
The essential business model of a REIT is to own real estates by becoming a landlord and make renovations to the buildings to increase properties value. Investment in a REIT is considered an equity investment and investors will receive a regular share of income based on the profit of the building operations (i.e. leases after accounting for operating expenses). The investors will also benefit from appreciation in the value of real estate assets.
Unlike a REIT, mortgage income funds do not aim to hold real estate assets. Also, mortgage fund gets paid from borrowers’ monthly interest rather than from income from building operations.
Morrison Financial’s Mortgage Income Funds operate very similarly to a MIC (Mortgage Investment Corporation). We issue private mortgages, secured by underlying Real Estate assets. We differ slightly in that there aren’t the same restrictions on our funds as there are on the MICs.
For example, at least 50% of a MIC’s assets must be to residential mortgages, and/or cash and insured deposits at qualifying member financial institutions. Morrison Financial doesn’t have this same restriction. We also tend to lend to developers more than homeowners.
Mortgage funds’ yield is significantly higher than that of investment grade bonds (e.g. US and Canada 10-year government bond). Junk bonds provide comparable or higher yield but they carry significant default risk. Over the last 30+ years, Morrison Financial has had very few defaults and none that resulted in loss to investors.
- Cineplex – in the middle of the pandemic, with the majority of their locations closed – did an offering of an “unrated deal” which priced at 7.5%. Currently, CCC bonds would be around 6.5%. If we can generate 6-9% (Jnr and Snr), on projects that have an LTV between 70-85%, we believe we can offer a higher yield, for lower risk, when compared to a junk issuance on the public side.
- Junk bonds, especially those CCC and lower, carry significant default risk, whereas Morrison Financial has had very few defaults in 30+ year history.
A dividend stock aims to create value for its holder in two ways:
- First, by the appreciation of the underlying value of the stock (capital gains); and
- Second, by paying some form of dividend to the shareholders.
Unlike this model, the Morrison Financial Income Funds aim to pay our unitholders a monthly income – which would often be a much higher yield than a dividend yield. However, our mortgage funds do not generate a capital gain on the principal investment. Investors can choose to reinvest the monthly distribution; this would help grow the capital – but still it wouldn’t be treated as a capital gain.
The final difference between our income funds and a dividend stock would be in the taxation of the distribution. There are differences between a stock that offers an eligible dividend and our fund distributions; for more information about your personal taxes, please consult an accountant or a tax expert.
Private equity is an alternative form of private financing, away from public markets, in which funds and investors directly invest in companies or engage in buyouts of such companies. Private debt includes any debt held by or extended to privately held companies. It comes in many forms, but most commonly involves non-bank institutions making loans to private companies or buying those loans on the secondary market.
A hedge fund is an investment vehicle that uses pooled funds to achieve active returns for its investors. Hedge funds typically have a number of tools they can use to improve returns, regardless of what the underlying market is doing – these typically include leverage or short selling.
A mutual fund is an investment vehicle that pools money collected from investors and uses it to invest in asset classes like stocks, bonds, or money market instruments. There are many types of mutual funds, they can be specific – like a US Equity Fund or Bitcoin Fund, they can be an all-encompassing solution – like a Global Balanced Fund, or they can be an alternative to a cash savings account – like a High Interest Savings Fund. Mutual funds can also be ‘active’ or ‘passive’ in their management strategy.
Still have questions?
Mortgage investing can be secured and straightforward. Reach out today to speak with a finance professional.