A Mortgage Investment Corporation (MIC) serves as a vehicle for pooling investor funds to provide short-to-medium-term financing, typically ranging from 6 to 36 months, secured by real estate assets. The revenue generated from interest and fees paid by borrowers, after deducting operating expenses, is distributed to investors in proportion to their investment.

Given the prevailing low-interest-rate environment, investors seeking enhanced yields are increasingly attracted to the MIC sector.

MICs operate by distributing profits to their shareholders based on their respective ownership stakes. The underlying assets securing the investments consist of real property, though additional forms of security such as personal and corporate guarantees, general security agreements, and assignments of material contracts may complement the collateral.

Investing in a MIC involves owning shares in a company that oversees a diversified portfolio of secured mortgages. These shares qualify as investments under the Income Tax Act 130.1 (Canada), thus eligible for inclusion in registered accounts such as RRSPs, RRIFs, TFSAs, RESPs, and others, providing tax advantages for investors.

The Canadian residential mortgage market was estimated to have $2.0 trillion in principal outstanding. Of this, MIC's represent just 1.65% ($32.9 billion) of mortgage lending. The majority is held by the large banks and credit unions (93.5% as of Q4, 2023), while dedicated Mortgage Finance Corporations make up the balance (4.65%).

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.

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).

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).

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.

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.