Compound Interest on a Mortgage Investment: How a DRIP Changes the Math

For investors who do not need the cash, mortgage investment compound interest is the main lever on long-term growth: reinvest each distribution, and the next one is paid on a slightly larger balance. This page explains how that works in a MIC, provides a calculator to compare reinvesting with taking cash, and sets out what the projection leaves out.

This is general education, not investment, tax or legal advice. Projections are illustrative and assume a constant rate; they are not a forecast and do not imply any particular path. Mortgage investments are not guaranteed. Returns are targets, not promises, and principal can be lost. Higher yields come with higher risk.

What is a DRIP in a MIC?

A DRIP is a plan that uses a MIC’s distributions to issue the investor additional shares instead of paying cash. On this page DRIP means dividend reinvestment plan, because a MIC pays dividends. Canadian issuers also use distribution reinvestment plan (often used by trusts, which pay distributions) and dividend reinvestment program; the mechanism is the same. (Terms are defined in the mortgage investment glossary.)

The reinvested shares are issued at the price the plan or offering memorandum sets, and they carry the same rights, risks and redemption terms as the original shares. Lendmax Capital MIC, for example, pays distributions quarterly, which shareholders can take in cash or reinvest through its DRIP.

How the DRIP compounding calculator works

The calculator projects a balance under constant assumptions so that reinvesting and taking cash can be compared side by side. Enter:

• Amount — the starting investment, in dollars.
• Annual distribution rate (%) — the net rate paid to investors, after fees.
• Years — how long the money stays invested.
• Distribution frequency — quarterly.
• Reinvest — yes (DRIP) or no (cash).
• Comparison rate (%), optional — a second rate, to see how sensitive the result is.

Assumptions shown on screen: the rate stays constant for the whole period; distributions are paid at the end of each quarter and, if reinvested, reinvested in full at a constant share price with no fees; no tax is deducted; and there are no losses or redemptions.

The method: simple vs compound return in mortgage investing

The calculator applies two formulas, one for each choice. With a quarterly frequency, the quarterly rate is the annual rate ÷ 4, and the number of periods is years × 4.

• Cash (simple return). Capital stays at the starting amount, and each quarter pays amount × quarterly rate. Total cash received = amount × annual rate × years. Ending value = amount + total cash.
• DRIP (compound return). Each distribution is added to the balance. Ending balance = amount × (1 + quarterly rate)^(number of quarters).

Quarterly compounding also lifts the effective annual rate slightly above the stated rate: at 8%, (1 + 0.02)^4 − 1 = 8.24%.

A worked example: cash or DRIP over five and ten years

Running the formulas once by hand shows how the gap opens.

Worked example (illustrative)

Inputs, assumed for clear arithmetic: $50,000 invested at an 8% annual distribution rate, paid quarterly. Quarterly rate 8% ÷ 4 = 2%.

Five years (20 quarters):

• Cash: $50,000 × 2% = $1,000 a quarter; 20 × $1,000 = $20,000 received. Capital stays $50,000, so the total is $70,000.
• DRIP: the first quarter adds $1,000 (balance $51,000); the second adds $51,000 × 2% = $1,020 (balance $52,020); and so on. After 20 quarters: $50,000 × 1.02^20 = $50,000 × 1.485947 = $74,297.37.
• Compounding advantage: $74,297.37 − $70,000 = $4,297.37.

Ten years (40 quarters):

• Cash: $50,000 + ($50,000 × 8% × 10) = $90,000.
• DRIP: $50,000 × 1.02^40 = $50,000 × 2.208040 = $110,401.98.
• Compounding advantage: $20,401.98.

Comparison rate of 6%, five years: quarterly rate 1.5%; DRIP $50,000 × 1.015^20 = $67,342.75, against $65,000 in cash and capital. A two-point lower rate cuts the five-year DRIP balance by $6,954.62.

How tax affects mortgage investment compound interest

In a non-registered account, reinvested MIC distributions are taxed in the year they are paid, exactly as cash distributions are. Subsection 130.1(2) of the Income Tax Act deems them to be interest, so they appear on a T5 even though no cash was received, and the tax is paid from other money.

To see the effect, enter an after-tax rate. At an assumed 30% marginal rate, 8% becomes 8% × (1 − 0.30) = 5.6%, and $50,000 grows to $66,028.15 over five years — compared with $74,297.37 untaxed. Inside a TFSA, income is generally not taxed; inside an RRSP or RRIF, tax is deferred until withdrawal. Tax information is as at October 2026; a Canadian tax professional can confirm how it applies to you. The after-tax yield calculator shows the one-year effect in more detail.

How do I reinvest my mortgage investment distributions?

Reinvestment is an election, made once and changeable on the terms the plan sets. The usual steps:

1. Confirm a DRIP exists. The offering memorandum states whether distributions can be reinvested and on what terms.
2. Elect it. Usually on the subscription agreement, or later by written instruction to the issuer or your dealer.
3. For registered plans, make the election through the self-directed plan trustee, since the plan holds the shares.
4. Check your statements. Each distribution period’s statement shows the additional shares issued.

Direct and syndicated mortgages have no DRIP. Interest and returned principal sit as cash until the investor funds another loan, which is one reason pooled structures compound more smoothly. The cash-flow side is covered in monthly income from mortgage investments.

What the projection does not show

A constant-rate projection is a teaching tool, and real outcomes differ in ways the calculator cannot capture.

• Variable distributions. Rates change from year to year, and distributions are not guaranteed: they may be reduced or suspended. Any historical rate needs its period and source, and past performance does not indicate future results. Where the return comes from is explained in where mortgage investment returns come from.
• Losses. Loan losses can reduce the value of the shares, and compounding then works on a smaller base.
• Concentration. Reinvesting increases the amount held in one investment, managed by one manager.
• Liquidity. Reinvested shares are subject to the same redemption terms as the originals: notice periods, and the board’s right to defer or suspend redemptions, with no secondary market. See liquidity and redemption.
• Fees and inflation. Enter a net rate; the calculator does not adjust for inflation.

What this means for a mortgage investor

A DRIP turns a mortgage investment’s distributions into more shares, so the balance compounds instead of staying flat, and the advantage grows with time — provided the distributions continue. The arithmetic is simple; the uncertainty lies in whether the rate, the share value and the investor’s access to capital hold up over the years. The rate being compounded is shaped by the seven axes on which mortgage investments vary: the borrower, the property, the loan-to-value, the security position, the term, the jurisdiction and the investment structure.