Mortgage Investments for Above Average Yields

As you know, there are two sides to the mortgage business – the products side and the investment side. There are many Mortgage Investment Corporations (or MICs) which operate by pooling investment money from individuals. Investing in such companies can mean both higher income and security.

However, a word of caution is appropriate here. MICs have a checkered history. There have been a number of spectacular failures in the past. Many investors have lost a lot of money. Fundamentally, you must examine the people involved in the MIC, their modus operandi (any insider dealings), their knowledge of the business, and, last but not least, their historic results. Fortunately, as your advocate, I have already done the due diligence (or detailed home work) for you.

If you are interested in this type of investment, which can give you consistently better returns than parking your money in a GIC, Some of them even qualify for RRSP and other Canadian tax deferral programmes. But you must take your time to understand the risks first. Double check the history of the people behind every MIC.

Canada Mortgage Bonds

If you are a fixed income investor, you may want to consider Canada Mortgage Bonds (CMBs) as an alternative to Government of Canada bonds. CMBs yield slightly more than Government of Canada bonds. Since the principal and interest for CMBs are guaranteed by the Government of Canada, the bonds carry an AAA/AA1 credit rating. This is the highest rating of any issuer in Canada.

The Canada Mortgage Bond program is the Canada Mortgage and Housing Corporation’s housing finance initiative. The CMHC’s aim is to lower mortgage costs by providing the Canadian mortgage market with an alternative source of financing that is competitive. CMBs are issued via Canada Housing Trust, a special purpose trust created for this purpose. The trust uses the proceeds of the bond sales to purchase residential mortgages from approved sellers. CMBs enable both institutional investors and individuals to invest in Canadian residential mortgages through this high-quality, easily tradable and guaranteed bonds.

CMBs were initially launched in June, 2001. New issues come into the market from time to time. However, if you are interested in these bonds you can purchase them at any time in the secondary market through your broker. Similarly, if you need to sell them before maturity, you can do so in the secondary market. Like most other bonds, CMBs are fixed-interest coupon bonds.

Interest payments are made twice a year over the term of the bond, with repayment of principal on the specified maturity date. These bonds are fully eligible for registered plans such as RRSPs and RIEs.

You can buy CMBs in denominations of $1,000 (or multiples thereof). They can be of any term, although new issues entering the market usually are for a five-year term.

There are of course other fixed income investments that provide higher yields. But safety, marginally higher yields compared to Government of Canada bonds and liquidity make these bonds suitable for conservative fixed income investors.