Question 1

What is a Mortgage Investment Corporation (MIC )?

Accepted Answer

A MIC pools investor funds to offer short-term financing  6-36 months) backed by real estate. The interest and fees paid by borrowers, net of operating costs, are passed on to investors. Due to the current low interest rate environment, investors seeking higher yields are drawn to the MIC space.   Profits generated by MICs are distributed to its shareholders according to their proportional interest. The mortgages are secured primarily on real property, but can be in conjunction with other forms of security such as: personal and corporate guarantees, general security agreements, and assignments of material contracts (ie. insurance policies prepared by lawyers for the MIC).   Owning shares in a mortgage investment corporation means you are investing in a company which manages a diversified and secured group of mortgages. Shares of a MIC are qualified investments under the Income Tax Act 130.1(Canada) for RRSP, RRIF, TFSA, RESP and more.

Question 2

What role do MICs play in the Canadian residential mortgage market?

Accepted Answer

The Canadian residential mortgage market was estimated to have $1.3-$1.4 trillion in principal outstanding. Of this, MIC's represent just 1% ($13-14 Billion) of mortgage lending. The majority is held by the large banks and credit unions (89% as of Q3, 2018), while dedicated Mortgage Finance Corporations make up the balance (6%).

Question 3

How does the HRU MIC compare to other investments like stocks?

Accepted Answer

There are a number of advantages with HRU:   Unlike publicly traded stocks or mutual funds, NAVPS (Net Asset Value Per Share) of the MIC does not fluctuate in response to market trends. Unless HRU MIC experiences an operating loss, the share values are always equivalent to the share issue price. This is because of the Income Tax Act (ITA) rule requiring 100% of a MIC's net income to be paid out to the shareholders by way of dividends.   Secondly, HRU MIC share values are a function of the quality of mortgage portfolio. Real estate values are much less volatile than stock and bond prices. Even if the borrower defaults, the mortgage investor is protected by a collateral asset that is stable and immoveable, and risk is spread across the entire pool of investments.   In addition, HRU MIC's mortgage portfolio is considered to be stable for a number of reasons: 1. All of the real estate securities are residential, comprised of single family homes   2. The maximum loan-to- value for a loan is 75% and the actual loan-to-value of portfolio is often below this (71% LTV as of Q1 2020).   3. Lending is only in the GTA, Canada's largest and most liquid housing market.   4. Highly trained and experienced underwriters and management   5. We have rigourous monthly compliance reviews, and are audited every year by the Canada Revenue Agency.

Question 4

Why do borrowers use MICs over banks?

Accepted Answer

MICs offer advantages over traditional banks and lenders because they have more flexible lending guidelines. MICs can offer individually-structured, tailor-made loans to meet the specific requirements of a borrower. In addition, banks have lengthy due diligence processes (up to 2 months) and are typically not able to meet some borrowers’ quick capital needs. Most MICs are typically able to structure, complete due diligence and fund loans within 2 - 4 weeks.   In return for this flexibility, non-bank lenders such as MICs, can charge higher interest rates on their loans (5% - 15% p.a. in the current environment).

Question 5

How does HRU MIC make money?

Accepted Answer

Our business model is very similar to the traditional banks. We are considered a balance sheet lender in which we accumulate assets in fixed-term interest-based investments, and lend out mortgages to residential borrowers. The collected monthly mortgage interest is paid to our investors as monthly interest return (similar to a saving accounts).

Question 6

What is the minimum investment I can make?

Accepted Answer

The minimum amount is $10,000 with exceptions to Registered Accounts, and will require the investor to have an Eligible Investor Certificate. Investors who choose to invest over $100,000 will require an Accredited Investor Certificate. Both certificates can be completed with your Exempt Market Dealer (EMD) or our Financial Advisors.   An appointment with an Advisor can also be made through us by calling us at 1-888-883-2365.

Question 7

How will my return be treated for Tax purposes?

Accepted Answer

Mortgage Investment Corporations have a special tax status. The Canada Revenue Agency will deem your income from HRU MIC to be interest income and tax it accordingly; T5 slips are issued at the end of each calendar year.   Foreign Investors will be subject to a withholding tax dependant on the tax treaties between Canada and the Investor's Resident Country. For example, Hong Kong has a Maximum 10% Tax Rate and Cayman Island has 0% Tax Rate.

Question 8

How do changes to the Real Estate Market and Prime Rate affect HRU?

Accepted Answer

While real estate values may change, investors do not have the same concerns as owners about possible value losses. As long as the financing opportunities are well selected, the return is fixed over the life of the financing.   A real estate correction does not impact our performance. With HRU MIC, we're a lender, not an owner. There's really never a 'bad' time to lend money if it is backed by security.   For changes in the prime lending rate, we simply adjust with the industry by maintaining a consistent spread above Bank Lending rates.

Question 9

What is a second mortgage? Is it bad?

Accepted Answer

The main difference between a first (Senior) and second (Subordinated) mortgage is debt seniority. A second mortgage is not "worse" than a first mortgage, it is simply the position it occupies in terms of "which mortgage gets paid first". A Home-Equity Line of Credit (HELOC), for example, is often a second mortgage if there is still an existing mortgage on the property. From a lender's perspective, in the event of a default, both first and second mortgagees have the right to foreclose on the property and sell it on the market for repayment. However, the first mortgagee is at the first position to get the proceeds; and the second mortgagee will be entitled to the remaining amount. Since second mortgages are behind (subordinate to) the first mortgage, they can be considered more risky and therefore demand a higher return. In today's market, first mortgage interest rates often range from 3-5%, while second mortgage interest rates can be 10% or higher. Since HRU includes higher-rate second mortgages in our portfolio, we can provide our investors with higher returns.