When it comes to alternative investment strategies, the real estate market gets a lot of attention. When investors learn about Mortgage Investment Corporations (MIC), they naturally see the similarity between MICs and Mortage-Backed Securities (MBS). Although the two possess some similarities, many differences set them apart that you should be aware of.
Both are a type of pooled investment. An investor invests with an MIC or an MBS, and their money is invested into multiple mortgages to better diversify their investment. Because the Mortgage Investment Corporation or the lending bank of the Mortgage-Backed Security handles the mortgages, the investor needs very little knowledge of the mortgage lending process. MICs and MBS can both be held in registered accounts and are considered qualified investments under the Canadian Income Tax Act.
MBS is created from mortgages lent out by the major banks. These mortgages are then pooled, managed, and sold through a broker, essentially making the big banks a middle man. A Mortgage-Backed Security is considered a kind of bond that’s backed by the mortgages which make up the pooled investment.
After the 2007 real estate crisis, the regulation of MBS became more strict. An MSB can only be issued by a government-sponsored enterprise (GSE) or a private financial company. Only mortgages that qualify under the National Housing Act (NHA) and the Canadian Mortgage Bond (CMB) programs can be used in an MBS.
There are two types of MBS: pre-payable mortgage pools and non-pre-payable mortgage pools. A pre-payable allows borrowers to pay more than the primary amount on their loan at will. This flexibility in payments means a more varying stream of returned principle for investors. A non-pre-payable pool doesn’t allow for these diverse payments.
The MIC was first seen in 1973 thanks to the Residential Mortgage Financing Act. Instead of mortgages through banks, these private mortgages are offered through independent corporations that are provincially registered and licensed.
Although both MICs and MBS deal heavily in residential properties, MICs can have more commercial projects as long as the percentage of the fund follows the requirements of the income tax act.
MICs can lend to projects and people that a bank typically could not. Generally speaking, the MIC is dealing with the lending and administration of the fund itself. There’s no third party involved as there would be in the MBS process.
There’s more regulation surrounding MBS, and it’s due to this that we’ve seen more growth in the Mortgage Investment Corporation sector recently to meet the demand. Another key benefit of MICs is that they often lend at higher interest rates offering higher returns to their investors. MICs also experience less fluctuation based on Canadian interest rates and the real estate market because they set their rates — generally higher than the banks.
Although there are similarities between Mortgage Investment Corporations and Mortgage-Backed Securities, there are enough differences between them to warrant notice. Both serve entirely different purposes in an investment portfolio, and they operate differently based on regulatory agencies and goals. These differences are what will have a significant impact on investors and should be considered when making a decision.
If you’re looking for the flexibility and more involved nature of a Mortgage Investment Corporation, get in touch with Jordan on our team today to learn more.