How to Start Investing in Mortgages: The Process Step by Step

This page is for readers who have done their background reading on mortgage investing and want to know what actually happens next: who they deal with, what they sign, how the money moves and what arrives afterwards. It describes the process for buying shares of a mortgage investment corporation (MIC) — a common pooled route into private mortgages — and notes where a mortgage held directly differs.

Lendmax Capital MIC uses a four-step process — application with a dealing representative, qualification and suitability review by an exempt market dealer, funding, and account management with quarterly distributions — and that sequence frames this guide. Describing the process does not make any investment appropriate for any reader; that judgment belongs to the dealer’s suitability review. This is general education, not investment, tax or legal advice. Mortgage investments are not guaranteed. Returns are targets, not promises, and principal can be lost.

What you are buying when you invest in a MIC

A MIC share is a security, not a deposit or a loan in your name. A MIC is a Canadian corporation that meets the conditions in section 130.1 of the Income Tax Act; it pools investors’ money into a portfolio of mortgages and distributes its income to shareholders. Lendmax Capital MIC, for example, lends residential first and second mortgages in Ontario, British Columbia and Alberta through licensed mortgage brokers.

Four features shape the process that follows:

• It is an exempt-market security. MIC shares are usually sold without a prospectus, under exemptions in National Instrument 45-106, so they are bought through a registered dealer rather than a stock exchange. The disclosure document is an offering memorandum.
• It is illiquid. There is no secondary market. Shares are redeemed under the MIC’s articles and offering memorandum, with notice periods, and the board can defer or suspend redemptions.
• Income is not fixed. Distributions are targets, not promises; they can be reduced or suspended.
• It is not insured. MIC shares are not deposits and carry no CDIC or provincial deposit insurance.

Investors who can accept those features for the money involved might consider the process below. A MIC offers no guarantee of principal and no quick access to money, so investors who need either will find these features hard to reconcile.

How to start investing in mortgages: the four steps at a glance

The table summarises who does what at each stage of the mortgage investment process.

The mortgage investment process steps in detail

1. Apply through a dealing representative

Start by speaking with a dealing representative — an individual registered with an exempt market dealer (EMD), the category of securities dealer permitted to sell exempt-market securities such as MIC shares. Before going further, check that both the firm and the individual are registered, using the CSA National Registration Search.

At this stage the representative explains the offering and gives you the offering memorandum. Read it before discussing amounts. It sets out the MIC’s business and lending policies, the fees, the redemption terms, the risk factors and the audited financial statements. Questions worth putting to the representative at this point include how loans are underwritten, how much of the portfolio sits in each province and position, how many loans are in arrears, and what happened to distributions in difficult years. The mortgage investor’s due-diligence checklist sets out the full list. No money changes hands at this step.

2. Complete the qualification and suitability review

Next, provide the information the dealer needs to complete its know-your-client and suitability review. Registered dealers have know-your-client, know-your-product and suitability obligations under the registrant rules in National Instrument 31-103, and they must complete that review before accepting a subscription.

The review covers four things:

• Who you are. Identity verification and contact details.
• Your circumstances. Income, assets, investment knowledge, objectives, time horizon and tolerance for risk, including for illiquidity.
• Which exemption applies. Most MIC shares are sold under the accredited investor exemption or the offering memorandum (OM) exemption. In summary, an individual is an accredited investor with financial assets over $1,000,000 (alone or with a spouse) net of related liabilities, or net income before tax over $200,000 (over $300,000 with a spouse) in each of the two most recent years with the same expected this year, or net assets of at least $5,000,000. Under the OM exemption in Alberta, New Brunswick, Nova Scotia, Ontario, Québec and Saskatchewan, individuals who are not eligible investors can invest up to $10,000 in 12 months, eligible investors up to $30,000, and eligible investors who receive suitability advice from a portfolio manager, investment dealer or exempt market dealer up to $100,000; other provinces differ. Thresholds summarised; confirm current definitions with a registered dealer, and see who counts as an accredited investor.
• Whether the investment is suitable. The dealer decides whether the investment, and the amount, is suitable for you. It can recommend a smaller amount or decline the subscription.

You then sign the subscription agreement and, where the exemption requires it, a risk acknowledgement form. Read both; the subscription agreement contains the representations you make about your eligibility.

3. Fund the subscription

Then fund the subscription by one of three routes.

• Personal cash. Payment by wire, bank draft or electronic transfer, to the account named in the subscription documents. Confirm payment instructions directly with the dealer or issuer by a known phone number before sending money; changed payment details sent by email are a known fraud pattern.
• A corporation. Payment from the company’s own account, supported by a directors’ resolution authorising the investment and naming the signing officers.
• A registered plan. An RRSP, RRIF, TFSA, RESP, RDSP or FHSA held with a self-directed plan trustee — for Lendmax Capital MIC, Olympia Trust Company or Western Pacific Trust Company. You open the account, the trustee arranges a direct transfer from your existing plan, and the trustee subscribes for the shares on your instructions. This takes longer than a cash subscription. See holding mortgage investments in an RRSP, TFSA or RRIF.

Once the issuer accepts the subscription, it issues the shares and sends a confirmation showing the number and class of shares and the date. The subscription documents state what happens to your money if a subscription is not accepted.

4. Manage the account and receive quarterly distributions

Finally, manage the holding over time. Lendmax Capital MIC pays distributions quarterly, in cash or reinvested through a dividend reinvestment plan (DRIP); other issuers set their own schedules. Distributions are not guaranteed and may be reduced or suspended. Outside a registered plan, distributions — including reinvested ones — are taxable and reported on a T5 slip.

Ongoing account management includes:

• Reading what you receive. Statements, the annual audited financial statements and tax slips. What to expect as a mortgage investor covers reporting in detail.
• Keeping your information current. Tell the dealer when your circumstances, address or residency change, so the suitability record stays accurate.
• Redeeming under the terms. Redemption requests follow the articles and the offering memorandum: notice periods, any early-redemption charges, and the board’s right to defer or suspend. Liquidity and redemption explains how that works in practice.

Putting the steps together

Worked example (illustrative)

Every figure is assumed for illustration. An Ontario investor is an eligible investor but not an accredited investor, and is considering $60,000: $40,000 from a TFSA and $20,000 in cash.

1. Apply. The investor checks the dealer’s registration, receives the offering memorandum and reads it.
2. Qualify. Under the OM exemption in Ontario, an eligible investor is limited to $30,000 in 12 months, or $100,000 if they receive suitability advice from an exempt market dealer. The dealer provides that advice and concludes that $60,000 is suitable; had it concluded otherwise, the amount would be reduced. The investor signs the subscription agreement and risk acknowledgement form.
3. Fund. The trustee moves $40,000 by direct transfer into a self-directed TFSA and subscribes; the investor wires $20,000 from a bank account after confirming the instructions by phone.
4. Manage. Assume an annual distribution target of 8%, paid quarterly: $60,000 × 8% ÷ 4 = $1,200 a quarter — $800 in the TFSA and $400 in cash.

Over a year, on those assumptions:

• TFSA. $40,000 × 8% = $3,200, less an assumed $150 trustee fee = $3,050, with no tax.
• Cash holding. $20,000 × 8% = $1,600, taxed at an assumed 40% marginal rate: $1,600 × 40% = $640 tax, leaving $960.
• Total. $3,050 + $960 = $4,010, or about 6.68% on $60,000 after the fee and tax.

If distributions were reduced or loans were lost, every figure would fall. A higher yield in mortgage investing reflects higher risk — higher return, higher risk.

The documents you provide and the documents you receive

The paperwork runs in both directions.

You typically provide:

• Government-issued identification, for the dealer’s identity verification.
• Your social insurance number, so the issuer can issue tax slips.
• Banking details, for distributions and any redemption.
• Financial information supporting the exemption you rely on, which the dealer may ask you to evidence.
• For a corporation: articles, a directors’ resolution, and information on who owns or controls it.
• For a registered plan: the trustee’s account application and transfer form.

You receive:

• The offering memorandum, with audited financial statements and risk factors.
• The subscription agreement and any risk acknowledgement form.
• The issuer’s confirmation of the shares issued.
• Periodic statements, annual audited financial statements, and tax slips or trustee statements.

Due diligence before you sign

Each item names the document where the answer is found. How to evaluate a MIC explains how to read them.

• Dealer and representative registration — the CSA National Registration Search.
• Lending policies, loan-to-value limits and concentration limits — the offering memorandum.
• Loan performance, arrears and loss provisions — the notes to the audited financial statements.
• Fees at every level — the offering memorandum.
• Redemption terms — the offering memorandum and the MIC’s articles.
• Who administers the loans, and under what licence — the offering memorandum; in Ontario, FSRA’s licensee information.
• Distribution history — the issuer’s published performance, read with its period. Past performance does not indicate future results.

Common mistakes in the investment process

These come from questions investors ask and from regulator investor-education material, such as the OSC’s GetSmarterAboutMoney site.

• Signing before reading the offering memorandum. The risk factors and redemption terms are the parts most often skipped.
• Not checking registration. An unregistered seller is a red flag, whatever the product.
• Withdrawing RRSP money instead of transferring it. A withdrawal is generally taxable; a direct transfer is not.
• Sending money to unverified payment instructions. Confirm by phone, using a number you already trust.
• Misreading the OM limit. The 12-month limits count all of an individual’s OM-exemption purchases, not only those with one issuer.
• Treating redemption as on-demand access. Notice periods apply, and the board can defer or suspend.
• Forgetting that a DRIP is taxable. Reinvested distributions outside a registered plan still appear on the T5.

The glossary defines terms such as exempt market dealer, offering memorandum and DRIP.

What this means for a mortgage investor getting started

Investing in mortgages through a MIC follows four steps — apply through a dealing representative, complete the dealer’s qualification and suitability review, fund from cash, a corporation or a registered plan, and manage the account and its distributions — with the offering memorandum at the centre of each. The process confirms that the sale is lawful and suitable on the information given; it does not make the investment guaranteed, and principal can be lost. The investment itself still varies along seven axes: borrower, property, loan-to-value, security position, term, jurisdiction and investment structure, and the offering memorandum is where each of them is disclosed.