Don’t overlook mortgage investing

By Suzanne Sharma | September 11, 2013 | Last updated on September 11, 2013
4 min read

One path to yield may be through commercial mortgages. Investing in a mortgage investment corporation (MIC) could provide more income than the bond market, says Craig Machel, a portfolio manager and investment advisor with Macquarie Private Wealth in Toronto. That’s because when interest rates rise, so do lending rates; and investors will benefit from those higher rates.

MICs are loans extended to high-quality commercial property borrowers by asset management companies. These borrowers don’t go to a bank because the loans are too big, or the borrower has some credit issues.

But those factors don’t necessarily make MICs risky. In fact, these loans have loan-to-value ratios of “60% to 65%, and cash is distributed on a project-by-project basis,” says Machel, so there’s less risk to investors. He adds the borrowers simply require more flexible mortgage terms. For instance, if a building is worth $1 million, a non-conventional lender would offer $650,000, so there’s still $350,000 equity left. This means the value of the property “would have to fall a long way before the loan is in jeopardy,” he says.

And as long as investors don’t reach for higher yield, they can get consistent income. “If you want higher yield, you’re putting yourself in a position of risk,” says Machel. “Also, if you extend yourself on the risk side and start getting into second or third mortgages, or mortgages with less collateral on income or excessive loan-to-value ratios, then you could also be in trouble.”

Residential property loans