A mortgage is a tool that helps many Canadians afford their home, but it’s also one of the most common forms of leverage that investors use to grow their wealth.

With the mortgage market remaining strong in Canada, what if there was a way to profit from the mortgage industry while being a homeowner yourself?

Introducing: mortgage investing, a relatively unknown opportunity that Perch Capital is making accessible to retail investors and homeowners.

In this article we’re going to discuss mortgages as an investment vehicle, and how you can tap into the mortgage market as an investor.

Key takeaways

  • Mortgage lenders make profit through lending out their capital and charging interest to borrowers
  • Perch Capital offers the opportunity for investors to buy into our mortgage fund
  • It might make sense to leverage your existing equity to invest in an income-generating asset

What is a mortgage investment fund?

Like many firms, mortgage lenders often obtain the capital they use to finance their loans through investors. While it isn’t accessible to most retail investors due to the high minimum amount required, there are some firms that allow investors to purchase units in their mortgage fund.

At Perch Capital, we offer a mortgage investment fund which investors can buy into and start generating income in the form of interest.

A typical mortgage investment fund sells units to investors at a fixed dollar amount and lends the capital raised from investors to qualified borrowers through a private mortgage. Similar to conventional mortgages, the borrower is responsible for repaying the loan through a monthly mortgage payment.

Investors in Perch Capital earn a return from the interest paid by our qualified borrowers. Mortgage investing can take many forms, including mortgage investment corporations (MICs), a mortgage trust or a limited partnership mortgage fund. Each of these have a slightly different structure and tax treatment, but the concept of the fund is similar.

What is a private mortgage?

A private mortgage lender offers short-term (usually less than 1 year) mortgages to borrowers who need specialized mortgages that have difficulty getting qualified with a typical lender. 

The typical borrower well suited for a private mortgage from Perch Capital has been evaluated to ensure they qualify for a mortgage, including an audit of their income and credit, but needs additional short-term financing that can’t easily be accessed through traditional lending partners. Common scenarios include:

  • Renovation financing for short term projects (less than 6 months)
  • A need to bridge the down payment on a purchase they’ve already committed to, in the case the sale of their current home encounters a delay
  • Retaining favourable terms on an existing mortgage

While the exact reasons for needing short-term financing will vary for each borrower, to mitigate risk, Perch Capital looks for a clear and viable exit strategy within 12 months. This means that Perch Capital only loans to borrowers it expects will have the ability to refinance their mortgage with another lender or otherwise be able to pay off the loan by the end of the term.

Who should invest in a mortgage fund?

Mortgage funds are ideal for investors looking for income generating assets with a medium to low risk tolerance. If you have capital not required for day-to-day expenses, investing in a mortgage fund could offer a higher rate of return than a typically GIC or high interest savings account. However, unlike a savings account or GIC where you can start with $100 or $1,000, a mortgage fund typically requires a higher minimum investment. Perch Capital for example requires a minimum $10,000 investment.

Who is not well suited to invest in a mortgage fund?

We don’t recommend investing in a mortgage fund if you need immediate access to cash. When you buy units in a mortgage fund like Perch Capital, these units are not traded on a stock market and are subject to resale restrictions under securities legislation. Redeeming units require advance notice and will take time to convert into cash, similar to mutual funds.

What are the benefits of investing in a mortgage fund?

The goal of every investor is to generate a return on their investment, and a mortgage fund fulfills that purpose. With that being said, here are some of the specific reasons to choose a mortgage investment fund over alternatives:

  • Diversification with a high yield investment: Historically, mortgage fund investments have limited correlation with stocks and bonds. For example, in 2022 while stocks and bonds were down, Perch Capital’s mortgage fund would’ve generated an 8% return from mortgage interest.
  • Low volatility: Mortgage funds have limited volatility when compared to other assets like equities. Perch Capital’s fund units are bought and sold at a set price. The only variation comes in the form of the funds return, which may vary depending on the conditions of the mortgage market.
  • Reduce concentration risk: By investing in a mortgage fund, you gain access to a portfolio of mortgages which reduces exposure to any individual borrower. Retail investors are typically unable to lend to multiple borrowers on their own, and a mortgage fund gives you access to a diversified portfolio of mortgages.
  • Leverage deep industry expertise: Perch Capital’s mortgage fund team has extensive experience handling underwriting, servicing and mitigating defaults.

What are the risks of investing in a mortgage fund?

Of course like with most investments, there are risks that are associated with investing in a mortgage fund. The main risk with mortgages is that borrowers will default on their loans and investors will receive less than desirable returns. Most mortgage funds try to mitigate this by placing strict borrowing requirements on their customers.

Here are some drawbacks to investing in a mortgage fund:

  • Lack of liquidity: Investing in a mortgage fund can require minimum investment periods or restrictions on redemptions. It is not a liquid investment that you can redeem at will. Investors should be careful not to invest capital they may need to urgently withdraw.
  • Limited influence: Management will not run individual deals by you for approval. As an investor, you rely on the mortgage fund to assess and deploy capital wisely. 
  • Precise returns are unknown: Mortgage investment funds will communicate their target yield, however the actual payout will depend on borrowers making their mortgage payments. Perch Capital mitigates this risk by fully underwriting each deal and assessing the quality of the borrower and the property before issuing a mortgage approval, however nothing is certain and we cannot guarantee an exact return.