Over the past decade, the landscape of residential mortgage credit in British Columbia has experienced remarkable expansion. The consistent and robust growth in this sector is attributable to various factors, including increased demand for housing spurred by favourable demographics, urbanization trends, and historically low-interest rates.
Within this evolving landscape, an interesting development is the rise of Mortgage Investment Corporations (MICs). These unique entities have emerged as potent players in the lending ecosystem, offering attractive alternative lending sources for investors and borrowers alike.
Mortgage Investment Corporations, better known as MICs, are specialized investment and lending firms that provide mortgages to borrowers who may be overlooked by traditional banks.
They are typically able to offer more creative financing terms and facilitate a direct flow-through of net income to investors.
The emergence and growth of MICs in Greater Vancouver and throughout Canada signifies a shift in how mortgages are financed and invested in.
The History Of MICs
Mortgage Investment Corporations date back to 1973. This was the year when the Government of Canada introduced MICs under the Residential Mortgage Financing Act.
But why were MICs created in the first place?
The answer lies in two main goals. The first goal was to encourage private lending. Instead of relying solely on traditional banks, the government wanted to spur more private sector activity in the mortgage lending space.
The second goal was to make investments in residential mortgages and real estate more accessible for smaller investors. These are individuals who may not have large sums of money but are still interested in investing in mortgages and real estate.
Fast forward to today, MICs operate under a different set of rules. They are now mainly governed by the Income Tax Act, also known as the ITA. This act sets out rules for how MICs and their shareholders should operate. It’s a form of regulation that ensures MICs follow good business practices while providing guidelines for their lending activities.
The Rising Popularity Of Non-Bank Private Mortgage Loans
An interesting trend is unfolding in the mortgage landscape in Canada: the growing popularity of private non-bank mortgage loans, including in the Greater Vancouver region. This form of lending is becoming a preferred choice for a growing segment of borrowers.
But why are more and more people turning to non-bank mortgage loans?
There are several reasons. One of the main factors is the flexibility offered by these loans. Unlike traditional banks, non-bank lenders, such as MICs, can offer more creative financing terms. They can provide unique solutions tailored to the borrower’s individual needs. This flexibility is a big draw for many people.
Non-bank mortgage loans also often come with interest-only payment options. This means that, for a certain period, borrowers only have to pay the interest on the loan, not the principal. This can be a significant advantage for borrowers who need lower monthly payments in the short term.
Increasingly tougher mortgage qualification rules imposed by traditional banks also play a role in this trend. For instance, the ‘stress test’ rule requires borrowers to qualify at a higher interest rate than the actual rate of their mortgage. This rule makes it harder for many people to qualify for a bank mortgage, leading them to seek alternative lenders.
Another crucial factor is the rising interest rates. As the rates increase, it becomes more difficult for some borrowers to secure loans from traditional lenders. However, non-bank lenders like Mortgage Investment Corporations often cater to borrowers who may not qualify for traditional loans, making them an appealing alternative.
Despite coming with higher lender fees, the benefits of non-bank mortgage loans, such as those provided by MICs, often outweigh the costs. These loans offer a valuable financing option for those who may not fit into the traditional lending mould, contributing to their growing popularity.
Nature Of MIC Investment
Understanding how a Mortgage Investment Corporation operates and generates income provides a clear picture of why these corporations have been steadily gaining popularity among investors and borrowers alike.
A MIC functions by pooling investments through the issuance of shares to investors. These pooled funds are then invested in a portfolio of mortgages. The income generated by the MIC comes primarily from the interest and fees charged to borrowers. This model ensures that MICs have a consistent income stream, given that mortgage repayments are typically steady and predictable.
One key characteristic of MIC investments is the provision of real estate-secured loans. These loans are often short-term, generally ranging from 6 to 36 months. This short-term nature allows MICs to continuously manage their mortgage portfolios with new investments and repayments funding fresh mortgages.
Another characteristic is that income generated by the MIC, net of fees, loan interest, and other operational expenses, is paid out as dividends to investors. The distribution of these dividends is typically done regularly, providing a steady income stream for investors.
It’s worth noting that these dividends are treated as interest income in the hands of the shareholders, adding another layer of attractiveness to this form of investment.
Target Borrowers
While traditional financial institutions often favour borrowers with high credit scores and steady income, Mortgage Investment Corporations offer an alternative for those who might not fit the conventional mould. Let’s take a closer look at the types of borrowers who would benefit most from getting a mortgage from a MIC.
Self-Employed Borrowers
Traditional lenders often require a stable, regular income, which many self-employed individuals may not have. MICs can be more flexible, looking at the overall financial health and business performance rather than focusing strictly on income regularity.
Credit-Challenged Borrowers
For borrowers with a poor credit history or low credit score, obtaining a loan from traditional lenders can be challenging. MICs, however, might be willing to overlook credit score shortcomings if they believe in the borrower’s capacity to repay the loan.
Real Estate Investors
Individuals or businesses investing in real estate often require quick access to capital. Given that MICs are capable of offering individually-tailored loans that can be processed more quickly than traditional loans, they can be particularly attractive to real estate investors.
Short-Term Loan Seekers
Those in need of a short-term loan — for instance, to bridge a financial gap before selling a property or refinancing a mortgage — may find that MICs can more readily provide these types of loans.
Borrowers Needing Customized Loan Structures
MICs have the flexibility to tailor a mortgage to fit a specific situation or need, which can be ideal for borrowers with unique lending requirements.
High-Risk Borrowers
MICs often lend to high-risk borrowers whom traditional lenders might view as too risky due to unstable income or previous financial difficulties.
Final Thoughts
The rise of Mortgage Investment Corporations in British Columbia and across Canada is a testament to the dynamism and adaptability of the financial sector. These entities provide an alternative lending platform for borrowers while offering lucrative investment opportunities for investors.
But navigating the complexities of mortgages, whether you’re a borrower or an investor, can be daunting. This is where the expertise of a mortgage broker comes in.
A competent mortgage broker is well-versed in the intricacies of the mortgage landscape and can guide you through the process. They can provide insights into various lending options and ensure you find the best fit for your needs. Whether you’re self-employed and looking for flexibility, a credit-challenged borrower seeking understanding, or a real estate investor in need of quick capital, a mortgage broker can help find the best solution for you.
Ready to take the next step? Reach out to our team of experienced mortgage brokers today. We’ll help guide you through the process, providing expert advice tailored to your unique situation.
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