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19
Mar

Different Options For Investing In Mortgages

When it comes to investing, people like the idea of investing in mortgages because their money is going up against something with collateral which usually feels like a safe bet. Mortgages are definitely a lucrative area to invest. So, what are the options for investors when it comes to choosing a fixed-income product?

 

Home Buyers Plan

If you have a registered retirement savings plan or RRSP and you are a first time home buyer, you can actually take your first step as a mortgage lender by lending money to yourself from your savings. As a first time home buyer, you are eligible to borrow $25,000 from your RRSP's. The way it works is that you begin to repay your loan in year 2, and you have 15 years to complete the full repayment. 

You should be aware that with this particular plan you are waving tax-deferred growth on the capital you borrowed, however if it is the only way that you're able to purchase a home, this plan is usually worth the expense. 

With a large variety of mutual funds in Canada, 10,000 to be precise, it isn't shocking that many people invest in residential, industrial and commercial mortgages as well as mortgage-backed securities. All of these are considered Canadian fixed-income, short-term funds and should be thought of as mortgages. 

It's important to do your homework on the mortgage fund of your choice before digging in and investing. It will make a big difference if you know and understand the quality of the mortgages. Something to make sure to look for is a low management fee. Since mortgage funds are taxed as income and are better for RRSP or TFSA, a low management fee can become a relevant success factor. 

 

TSX-listed Companys

If you aren't inclined to invest in mortgages directly you may be interested in choosing a TSX-listed company within the mortgage industry. These companies cater to people who may not meet central bank regulations. A large amount of their business is comprised of mortgages for what some would call "higher risk" clients.

 

Mortgage investment corporations

Mortgage investment corporations (MICs) let people buy into a pool of different types of mortgages and are made under the Income Tax Act. This type of investment pays the entirety of it's net income in dividends to shareholders. Those dividends are taxed as interest income.

 

Somthing to keep in mind

Mortgage investments provide a constant cashflow. Also the cost of mutual funds and trusts can ebb and flow, so initial investments tend to vary. One thing that does hold true however is that carefully selecting your preferred type of mortgage investment will always hold a place in many people's portfolios due to the level of security they provide. 

by Paul
in Mortgage