Frontenac Mortgage Blog

Risk and Return: Mortgage Investments versus Traditional Equities

Risk and Return: Mortgage Investments versus Traditional Equities

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Blog-Date-1Apr 21, 2016

With the occasional exception of very large mortgage investment corporations such as MCAN Mortgage Corp, very few MICs are traded on the stock exchange. This isolation from mainstream trading means that mortgage investments possess a unique set of benefits and risks that upsets the conventional understanding of investment risk and return.

Return

Because most MICs are not tied in with major markets like the TSX, the returns they provide investors are not influenced by the volatility of traditional trading. For instance, in 2008, when the economy collapsed, many MICs had a productive year.

Furthermore, these returns qualify for RRSPs, RESPs, and TFSAs.

Risks

While MICs possess great potential to produce considerable fixed income returns for investors, like all investments, mortgage investments do come with some risk.

Some borrowers who utilize the services of mortgage investment corporations do so because they are unable to obtain a mortgage from a major financial institution. This may be a result of suspect credit, character or assets. Or, it could be that their situations simply does not seem viable to big lending brokers (such as building on vacant land).

Due to the nature of Mortgage Investment Corporations, investors need to be aware of liquidity. Annual liquidity is very common among most MICs as it is not realistic to invest in mortgages which generally last a year in the case of Frontenac, expect to have full-access to your funds any-time. Some MICs will allow redemptions in certain situations like death, disability or financial hardship to mitigate this.

The standard deviation of mortgage investments is dictated by the housing market. The more stable the market, the less variance of returns on investment. Though one of the benefits of buying into mortgage pooling is that investors can avoid the volatility of stock markets, MICs do not exist in a vacuum, and can experience dissimilar returns rates at different times, albeit to a lesser extent than most types of ventures.