The Globe and Mail

Gail Bebee is the author of No Hype – The Straight Goods on Investing Your Money. She can be reached at gbebee@gailbebee.com; her website is www.gailbebee.com. This is part nine of a 12-part series for people that are new to investing on their own.

Every day I read stories in the media about the latest home sales figures, where mortgage rates are going, construction starts and so on. What I rarely see are articles on mortgage lending.

Lending people money to buy real estate seems like a relatively low risk investment since the property is pledged as collateral. Mortgages are a significant business for all the major Canadian banks. This certainly suggests that mortgages are lucrative place to invest. What, then, are the options for a retail investor who wishes to invest in this fixed-income product?

For first-time home buyers with registered retirement savings plans (RRSP), lending yourself money from your RRSP to buy your first house is one way to become a mortgage lender. The federal government's Home Buyers' Plan lets Canadian residents borrow up to $25,000 from their RRSP to buy a first home. You must start repayments the second year after the year you withdrew the money and you have up to 15 years to repay your RRSP. For complete details, read the fine print at the Canada Revenue Agency website. Note that you are foregoing tax-deferred growth on the money you borrowed from your RRSP. But, if you cannot afford a house otherwise, I think the Home Buyers' Plan is worth this cost.

With over 10,000 mutual funds in Canada, it's not surprising that there are funds which invest in commercial, industrial and/or residential mortgages and mortgage-backed securities. These funds are part of the Canadian short-term, fixed-income fund class and should have the word mortgage in their name.

Once you've found a mortgage fund of interest, do some research so you understand what you are buying, especially the quality of the underlying mortgages. Look for funds with low management fees, an important success factor for fixed-income investments. Mortgage fund distributions are taxed as income, so they may be better candidates for an RRSP or TFSA.

Here are some mortgage funds picked from a GlobeFund Fund filter (no load; a management expense ratio (MER) of less than 2 per cent; a Globe 5-star rating of 2 or more) of the aforementioned fund class: