How to build more resilient portfolios with mortgage investments

To help their clients succeed, advisors need to rely on more than just traditional investments. They need to create portfolios that balance growth, income, and risk.

That calls for strategic portfolio diversification, which is why alternative investments have become increasingly popular. With their relative simplicity and return potential, mortgage investments are among the fastest-growing alternative asset classes.

“Mortgage investments offer enhanced returns, reliable income, and protection from market fluctuations. This makes for more resilient portfolios and gives investors a more secure foundation for long-term investment planning,” says Chris Baker, Senior Vice-president, Investment Sales, with CMI Financial Group.

CMI offers end-to-end private mortgage services, including alternative financing solutions to borrowers and a compelling fixed-income alternative to investors. The firm has funded more than $3 billion in mortgages and is one of Canada’s largest private lenders by new originations. CMI is also one of our country’s largest private mortgage investment firms, with more than $1 billion in assets under management.

What makes these mortgage solutions so appealing, and how can advisors best incorporate them into client portfolios?

Standing out during a volatile time

As Baker explains, investors are facing a period of ongoing market volatility; they’re also concerned with market concentration, inflation, and interest rate moves. Private mortgage investments stand out as a compelling choice within the alternatives universe. They offer attractive yields, predictable income, inflation protection, and capital preservation through real estate backing.

Baker notes that private lenders offer greater flexibility in the mortgage application process, often focusing on factors like equity and cash flow, without the rigid metrics required by traditional lenders. These mortgages carry higher rates as a result, translating into higher return potential for investors.

Mortgages are also asset-backed (by real estate collateral) investments. If a borrower defaults, the property can be sold to cover the loan. “This also makes them a safeguard against inflation and less prone to recessionary risks,” says Baker.

Unlike stocks and bonds, private mortgages have low correlation to public markets, providing stability during periods of volatility. As inflation rises, property values typically increase, strengthening the value of the underlying collateral. The steady income generated through regular interest payments enhances stability, offering returns even in uncertain times.

Benefits of MICs

CMI offers an efficient way to reap these benefits through mortgage investment corporations (MICs).

MICs are an alternative to direct mortgage investments, where investors fund entire mortgage transactions (either individually or as part of a small group). Instead, a MIC is a pooled fund that invests in a diversified portfolio of private mortgages on behalf of investors who are preferred shareholders in the fund.

While direct mortgage investments typically require a commitment of at least $500,000 to $1,000,000, MICs offer a much lower minimum, making them accessible to a wider range of investors.

“MICs allow investors to access the mortgage investment market through a professionally managed portfolio solution, requiring far less capital and carrying less risk than direct investments in individual mortgages,” says Baker.

He adds that capital preservation is a key focus for CMI’s fund managers, who allocate a monthly cash provision to cover potential loan losses (though these are rare) and ensure there is no impact on distributions. This reserve fund offers an extra layer of protection for the portfolios.

“Our MIC funds have remained strong through various economic conditions, with a solid record of meeting return targets and maintaining steady distributions.”

There’s a difference, too, between MICs and REITs (real estate investment trusts).

REITs invest directly in income-producing real estate, like apartments and office buildings, making them highly sensitive to interest rate fluctuations and real estate market conditions. In contrast, CMI’s MIC funds invest in mortgages secured by residential real estate, earning income primarily from interest payments. Because MICs set their own lending rates, they offer greater predictability—particularly in terms of yield.

MICs offer diversification across factors like mortgage type, loan size, loan-to-value ratio, security position, property type, and geographic location. They cater to a variety of risk and return profiles, offering tailored options to align with specific investor goals and comfort levels.

“Along with being a turnkey solution, this flexibility empowers advisors to integrate mortgages seamlessly into client portfolios,” he says.

A strategy for resilience and growth

CMI is entirely focused on the residential market, which Baker says isn’t as volatile as the commercial market. He reports that yields are often in the range of 7 to 12 percent, depending on the risk profile. Even higher-risk funds provide regular income, typically monthly. “That’s attractive for income-seeking investors like retirees.”

Baker says MICs are also structured to distribute 100 percent of their net income to shareholders, which can be held in tax-advantaged accounts like TFSAs, RRSPs and RRIFs.

Given today’s market dynamics, diversification across asset classes — including alternatives — is essential to building resilience against risk and uncertainty, and adding growth potential.

While some alternatives promote anticipated returns, which may or may not materialize, Baker emphasizes the predictability of mortgage investments “Our track record demonstrates consistent, realized yields, giving investors confidence in the stability of their earnings.”

To learn more about growing opportunities with mortgage investments, visit CMI Financial Group or watch the webinar replay video that aired on Tuesday, April 8, at 1:00 PM ET, to gain insights to help you position your clients for greater success