Skip to main content

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?

Story continues below advertisement

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.



New to direct investing? The series

More from Gail Bebee:





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:

MER

1 Yr Return, %

3 Yr Return, %

ACM Commercial Mortgage (private mutual fund)

0.97

9.64

-

HSBC Mortgage - I Series

1.48

6.14

4.44

National Bank Mortgage

1.67

4.82

3.98

Scotia Mortgage Income

1.20

5.66

4.17

TD Mortgage

1.73

7.21

4.80

Toronto Stock Exchange-listed companies include income trusts in the mortgage lending business. Firm Capital Mortgage Investment Trust is a non-bank lender in residential and commercial real estate niche markets that are under-serviced by the big banks. It is currently yielding about 9 per cent. Not too shabby, you say? Yes, but there are risks. It focuses on higher risk mortgages, things like bridge financing, construction lending and short-term mortgages. And then there is the question of what will happen to the unit price and distributions in 2011 when income trusts start to pay corporate tax. Another trust in the mortgage business is First National Financial , currently yielding 7.8 per cent.

If you take a pass on income trusts, you might consider investing in TSX-listed companies in the mortgage business. Home Capital is a company that caters to consumers who do not meet big bank credit requirements. A significant portion of their business is residential mortgages for these higher risk clients. It yields a 1.6-per-cent dividend. Equitable Group also underwrites higher risk residential mortgages and pays a 1.9-per-cent dividend. These are definitely higher risk investments and both stocks are near their 52-week highs, so proceed cautiously.

Mortgage investment corporations (MICs) are companies created under the Income Tax Act to enable people to invest in a pool of residential and other mortgages. A MIC pays 100 per cent of its annual net income to shareholders in the form of dividends which are taxed as interest income. MICs often underwrite higher risk mortgages, but the rewards are attractive for a fixed-income investment. For example, Fisgard Capital, a B.C.-based MIC, reported that its investors enjoyed a 2008 net cash return of 9.26 per cent. MIC's are typically smaller, private companies. A few trade on the TSX such as MCAN Mortgage , with a current yield of 7.8 per cent, and Timbercreek Mortgage Investment , with a current yield of 8.2 per cent. While MICs do focus on capital preservation and do spread the default risk, thorough due diligence is still essential before investing.

Story continues below advertisement

Mortgage investments generate a regular stream of cash, but they are not government bonds. There are risks. The value of your initial investment could vary: the price of mutual funds and exchange-listed trusts and companies do fluctuate. Furthermore, a mortgage company could go bankrupt due to excessive mortgage defaults as we witnessed with the sub-prime mortgage crisis in the U.S. (but not in Canada) over the past two years. However, it is my contention that a carefully selected holding of mortgage investments has a place in the portfolio of many direct investors. I think Canadian banks are on to something.

Report an error
Tickers mentioned in this story
Unchecking box will stop auto data updates
Comments

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed.

If your comment doesn't appear immediately it has been sent to a member of our moderation team for review

Read our community guidelines here

Discussion loading ...

Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.