In our continuing low interest rate environment, the search for yield continues.

One option is mortgage investment corporations (MICs), says Craig Machel, vice president and portfolio manager with Richardson GMP.

These instruments can help with diversification in fixed income portfolios. “You can earn a nice income stream, and have a stable capital base that’s spitting off 6% to 9% return a year.”

As banks continue to restrict lending, the private MIC world is growing. “Banks demand longer, fixed terms; interest plus principle payments; and they typically don’t want to get involved in smaller, new build projects, or with new Canadian borrowers who don’t have a lengthy credit record in the country,” says Machel.

That’s where MICs come in: they offer loans to borrowers who typically wouldn’t get approved by traditional lenders.

But that doesn’t mean the loans are risky. In fact, these vehicles mitigate risk by ensuring borrowers have good credit quality, cash flow and liquidity. Investors should aim for loan-to-value (LTV) ratios of about 65%, he says.

Since these investments are dependent on the state of the Canadian real estate market, Machel suggests choosing players that have experienced its ups and downs. Some of his favourites include Trez Capital, Morrison Laurier, and Harbour Edge.

“Invest in guys who know how to get the job done through rockier stretches,” he says.


MICs vs. fixed income

Originally published in Advisor's Edge Report

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