It’s little surprise to many savvy investors that increasing numbers of Canadians are seeing the benefits of MIC investments. Investors get into a Mortgage Investment Corporation (MIC) by purchasing shares and signing an offering memorandum or subscription agreement that outlines the terms and conditions and sets forth the rights and expectations of the investor as well as the mortgage company.
It’s a process that is regulated by Canada’s securities commissions with most investors having to go through some level of prequalification to ensure they are a suitable investor for a particular MIC, and vice versa.
“Once the documentation has been signed, and approved by any intermediaries (such as an exempt market dealer), the investor will transfer funds to the MIC company. At that point, they are considered invested,” says Bryan Jaskolka, VP of Canadian Mortgages Inc. (CMI). “The MIC then issues a share certificate and the investor starts earning interest immediately on an ongoing basis. Our MIC makes a payment each month, so investors get the benefit of regular cashflow or the ability to potentially compound their gains with an automated re-investment of their dividends into more shares.”
The CMI MIC advises investors to expect returns in the range of 8.0– 8.5%, although the fund has been outperforming over the last year and consistently providing returns close to 9%. Jaskolka is happy to underestimate the MIC’s returns in order to avoid over promising and under delivering.”
Keeping management costs low is a top priority for a MIC’s leadership team and should be a key consideration for investors. There is a vast array of MICs in Canada, many of which follow different business models and incur a range of varying overheads. Just like any other investment fund, the overhead is something that needs to be paid for by the investment so, as a result, the higher the expense ratio, the riskier the investments the MIC has to make in order to meet its targets.
Jaskolka gives the example of a MIC that buys mortgages returning 15%, but has a 7% cost overhead. Although the MIC in question is only paying out 8% to the investors, it is forced into buying aggressive, risky mortgages to generate that modest return because of its high cost ratio. In this scenario, the return being received by investor doesn’t necessarily reflect the risk the underling MIC is taking.
“In our case, we use a lot of technology and piggy back onto our well established non-MIC lending platform to achieve a very low expense ratio, one of the lowest we are aware of,” Jaskolka says.
Our overhead totals around 1.5%-2%, which means that means if we are paying 8.5 %, we are buying mortgages that are 10%. That is significant for investors because it enables us to buy a lower risk mortgage transaction and still pay out a very attractive return, as opposed to other MICS who have exorbitant expenses.”
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