Private mortgage investment — the risks investors should weigh

What private mortgage investing actually is

A private mortgage fund (typically structured as a Mortgage Investment Corporation, or MIC) pools investor capital and lends it out as private mortgages — loans that don't fit A-tier bank criteria. Common borrower scenarios:

• Self-employed borrowers with non-traditional income documentation
• Borrowers needing fast funding (under 2 weeks)
• Borrowers in credit recovery (post-bankruptcy, recent consumer proposal)
• Real estate investors needing bridge financing
• Borrowers needing second mortgages on top of an existing first

The MIC charges these borrowers 8-13% rates (vs A-tier 5-6%), plus 1-3% lender fees at funding. After management fees and reserves, the net yield to investors typically lands at 7-10%.

For investors used to GIC yields of 3-5%, the spread is appealing. But the spread exists for specific structural reasons — namely, the risks bank deposits don't have.

The five risk categories

1. Credit risk — borrower defaults

Even with strong underwriting, some borrowers stop paying. Industry data suggests typical Canadian private MIC default rates run 2-5% annually, with 90+ day arrears (a leading indicator) typically running 2-4%.

What happens when a borrower defaults:

• Stage 1: Late notice + collection efforts (30-60 days)
• Stage 2: Formal demand letter + power of sale or foreclosure initiated (60-90 days)
• Stage 3: Property listed for sale; sale completes (3-12 months depending on province)
• Stage 4: Sale proceeds applied to loan + costs; investor recovers the loan or takes a loss

The TIME to recovery is often what investors underestimate. A defaulted loan ties up capital and stops paying interest for 6-18 months while the foreclosure process runs.

2. Property risk — collateral value declines

The mortgage is secured by the property. If the property's value drops below the loan amount, recovery is incomplete. This is why loan-to-value (LTV) matters so much:

• 65% LTV: 35% cushion before investor loss — strong
• 75% LTV: 25% cushion — acceptable
• 80%+ LTV: minimal cushion — high risk

A 65% LTV first mortgage can absorb a 30% property decline before the principal is impaired. An 80% LTV second mortgage is wiped out if the property declines just 20%.

3. Liquidity risk — capital is locked up

Unlike a public REIT or a GIC, you can't exit a private MIC on demand:

• Quarterly redemption window typically with 60-90 days notice
• 12-month lockup usually applies from initial investment
• Suspension rights — most funds reserve the right to suspend redemptions during stress
• Partial redemptions only during high-redemption periods

If you need access to capital within 12 months, private mortgage investing isn't appropriate. Treat private MIC investments as 3+ year commitments.

4. Concentration risk — geography and property type

A small fund lending only in one city is hostage to that city's real estate cycle. Even larger funds can have concentrated exposure to a single sector (commercial, residential, construction).

Geographic concentration to watch:

• Single-city exposure — Calgary 2014-2016, Vancouver 2017-2019, Toronto 2022-2024 all had cycle declines
• Single-province exposure — Alberta 2014-2016 oil price crash
• Single-sector exposure — office commercial 2020-2024 was devastating

Good managers cap exposure per region, per borrower, and per property type. Ask for the concentration breakdown before subscribing.

5. Manager risk — underwriting discipline matters more than any single deal

The biggest variable in private mortgage investing isn't market conditions — it's the manager's underwriting discipline. Two MICs lending in the same market can have wildly different default and loss rates because:

• One has rigorous appraisal verification, the other accepts inflated appraisals
• One stress-tests borrowers, the other doesn't
• One reserves for losses, the other distributes everything
• One holds capital cycles, the other doesn't

Manager track record across one full cycle (a downturn) is the best signal. See 10 questions to ask a MIC manager.

What good managers do differently

The best Canadian private mortgage funds share these practices:

Underwriting

• Loan-to-value caps (typically 65-75% for first mortgages, 80% combined for second mortgages)
• Independent appraisals from approved appraiser panel
• Borrower stress test at +2% over coupon rate
• Property condition assessment + insurance verification
• Exit-strategy verification (can borrower refinance into A-tier in 12-18 months?)

Portfolio construction

• Geographic diversification (no more than 20-30% in any single market)
• Loan-size diversification (typical position 0.5-3% of fund)
• First mortgage focus (typically 70%+ in firsts)
• Term diversification (mix of 6-month, 1-year, 2-year loans)

Operations + reporting

• Quarterly investor reports with 90+ day arrears, default rates, recovery rates
• Annual audited financial statements
• Loan tape transparency (anonymized list of loans by LTV, geo, status)
• Clear distribution policy including suspension triggers
• Capital reserves of 1-3% of book

Governance

• Independent directors on the board
• Auditor + custodian / trustee
• Disciplined NAV process with independent verification
• Formal conflict-of-interest disclosure (especially when broker entity referring loans is related to the manager)

The yield curve you should actually expect

Headline numbers vs realistic outcomes:

| Fund profile | Target distribution | Realistic net yield | Cycle resilience | |---|---|---|---| | Conservative first-mortgage MIC | 7-8% | 6-7% after losses | Strong | | Mid-range MIC (some seconds) | 9-10% | 7-9% after losses | Moderate | | Aggressive MIC (heavy second, alt-A, construction) | 11-13% | 7-11% with cycle variability | Weaker — can suspend distributions | | Syndicated mortgage participation | 12-15% on individual deals | Highly variable; one deal can default | Single-deal risk |

If a manager advertises 12%+ with no cycle variability, that's a red flag — either the underwriting is aggressive (with future losses pending) or distributions are being supported by new investor capital.

How to size your exposure

Private mortgage investments should be sized appropriately within a diversified portfolio:

• Conservative allocation: 0-5% of total investment portfolio
• Moderate allocation: 5-15%
• Aggressive allocation: 15-25% (only for sophisticated investors comfortable with private market exposure)

Never put significant emergency-fund capital in a private MIC — the liquidity profile doesn't fit emergency-fund use.

What to do if a distribution gets suspended

If a fund you're invested in suspends distributions:

1. Don't panic-sell — secondary market for MIC units is typically very thin; you may take a haircut
2. Read the suspension communication carefully — manager should explain why, what they're doing about it, expected timeline
3. Attend the investor call — questions and dialogue with the manager are illuminating
4. Compare with other funds — sector-wide stress vs fund-specific issue
5. Plan to hold through the cycle — most well-managed funds resume distributions within 2-4 quarters

What to do next

1. Confirm you're an accredited investor — see accredited investor canada
2. Compare 3-5 private MICs on the metrics above
3. Demand 90+ day arrears, historical realized loss rate, and book concentration
4. Read the offering memorandum carefully — distribution policy, suspension rights, fees
5. Start small (5% of intended allocation) for the first 12 months
6. Hold within a registered account (TFSA, RRSP) to manage the interest-income tax efficiency

Private mortgage investing offers meaningful yield premium over bank deposits — for investors who understand the risk structure and size their exposure appropriately. The yield exists because the risks are real. Both can be true.