Returns on GICs and “high-rate” savings accounts have been in general decline for decades. Investors in these low income-generating products now face an uphill battle as inflation accelerates, with countries printing money at an astounding rate. Real inflation numbers are difficult to peg, though we’re convinced that money earning under 3-4% is losing the war.
Investors have rationally responded to low rates and inflation by piling into equities and real estate, pushing each to new heights. This has left many in the enviable albeit somewhat confounding position of having an incredible year financially in the midst of a pandemic.
The question many of this group are asking is “What do I do now?” It’s an important question, though an increasingly difficult one to answer with confidence in the current economic environment. Stock market volatility is making investors hesitant to go all-in at current valuations. Low interest bearing GICs and savings accounts are often a non-starter for the reasons above. Investing in private mortgage funds, commonly referred to as MICs, has been part of the answer for many.
A mortgage fund lends money (secured against real estate) to borrowers that may not qualify for conventional bank financing. Typically, borrowers from mortgage funds pay higher interest rates than they would with a bank. As a result, mortgage funds are often a temporary solution until the borrower can qualify for a lower-rate mortgage.
For investors, mortgage funds have the potential to generate higher income than most fixed income products such as GICs, often targeting returns of 6% or higher. Distributions are typically made quarterly or monthly.
Another attractive characteristic of mortgage investing is defensive positioning. Holding the debt on a property typically carries lower risk than investing in the equity of that property. This is because equity is the first money to be lost if there is a market downturn, giving investors more peace of mind in today’s economic climate.
There are over 200 private mortgage funds to choose from in Canada and many factors can influence their risk and return. These may include the type of property lent against, loan-to-value ratios, the composition of mortgages (1st, 2nd, or 3rd), the quality of the borrower, and the calibre of the fund’s team, just to name a few.
Hawkeye Wealth has extensively researched numerous private mortgage funds to provide investors with vetted options at little to no additional cost, saving them time and helping them invest with confidence.
To learn more about investing in mortgage funds, how to assess risk and return, and how to participate if interested, you can watch our recorded webinar and access an investor package here.