Let others make your mortgage payments for you
If you’re tired of paying your mortgage on your own then this post is for you. The MIC manoeuvre is a legal tax strategy that allows you to effectively get other people to service your mortgage, so you don’t have to. How does it work? You simply borrow money to purchase Mortgage Investment Corporations (MICs) which generate investment income. This income is then used to cover the cost of both your new loan and your mortgage payments. 😀
A MIC is a Canadian investment that holds mortgages secured by real property. It’s similar to a mortgage REIT in the United States. Some borrowers can’t get a mortgage from traditional lenders. But they can still obtain financing at a higher interest rate from alternative lenders such as MICs. If you invest in a MIC, the mortgage payment of someone else becomes your income! 😎
Similar to its cousin the Smith Manoeuvre, both strategies make use of tax deductible debt and financial leverage to increase your net worth. But unlike the Smith Manoeuvre, the MIC Manoeuvre also increases your cash flow. It does this by removing the biggest expense from your household budget – the mortgage payment!
How to implement the MIC manoeuvre
To keep calculations simple let’s say your current mortgage balance is $100,000. According to TD bank’s mortgage calculator, your monthly mortgage payment in the current interest rate environment would be $379. This works out to roughly $4,500 a year.
Everyone knows the best way to get rid of a home loan is to talk to actor Mortgage Freeman. But if you’re not that well connected, using the MIC manoeuvre will still save you that $4,500/year in payments. Here’s how it works.
Start by opening up a home equity line of credit (HELOC.) Then take out $150,000 from it and put the money into a discount brokerage account. You can generally borrow up to 80% of the value of your home. HELOC rates are about 3% these days, and payments can be interest only. This means the minimum payment you will have to make on your HELOC debt is $375 a month, or $4,500 a year.
So far your combined debt is $250K ($100K mortgage + $150K HELOC.) Your annual payment to service this debt is $9,000 ($4,500 + $4,500).
This is where the magic happens.😉 You take the newly funded $150,000 in your brokerage account and purchase a basket of Mortgage Investment Corporations, which can be publicly traded or private. In the past I’ve blogged about which ones I like and hold. Currently popular MICs such as Timbercreek and Atrium have yields around 8%. Disclaimer: I currently own both of them.
Using 8% yield as a benchmark, a handful of MICs worth $150,000 can expect to generate $12,000 in annual investment income.
Simply use your new investment income ($12K) to service your mortgage and HELOC payments ($9K). Any additional money left over at the end of each month can go towards paying down the HELOC debt. That’s pretty much it. 😎
Congrats! Instead of paying your own mortgage like a normie, you are now using other people’s mortgage payments to fund the payments of your own mortgage! How woke is that? 😁
Eventually your mortgage and HELOC balances will both be paid off – leaving you debt free! And your MIC portfolio will continue to provide you with regular passive income in perpetuity. Want to know the best part? Your MIC portfolio is funded entirely by the HELOC so you don’t have to use any of your own savings.
A natural hedge against monetary policy
You might be asking, but Liquid – what happens if interest rates rise?
No problem. 😉 The main reason the MIC manoeuvre works so well is its ability to offset the cost of future interest rate increases. If your bank starts to charge you a higher interest rate on your HELOC and mortgage, other lenders including MICs will most certainly increase their lending rates as well. So as a MIC investor your investment income will also go up. We witnessed this happen between 2014 to 2019 when the average cost of fixed rate Canadian mortgages slowly became 8% more expensive over those 5 years.
Meanwhile, many MICs also gradually increased their monthly distributions. For example the publicly traded Atrium MIC (AI.TO) paid $0.68/unit in 2014. However by 2019 it was up to $0.75/unit – representing a 10% increase over 5 years. Not only that but the unit price of AI.TO has also gone up so the capital appreciation is a nice bonus. 🙂
The risk of higher future rates is offset by the fact that the MIC maneuver is symmetrically hedged to the cost of borrowing – cancelling out the impact of interest rate movements. 😉
You should shelter as many MIC funds in your TFSA/RRSP as you can. This is because they distribute interest which is 100% taxable income. But keep in mind your HELOC interest expense will not be tax-deductible if MICs are held in tax sheltered accounts. In the vast majority of cases, after factoring in taxes, you should still be cash flow positive. 😉
The above example is known as a full MIC manoeuvre. It requires your investment loan to be about 1.5x your mortgage balance. But another good strategy is the MIC manoeuvre lite, where you borrow less money and buy just enough MICs for the investment income to cover all the interest of your debt, but not any principal. In other words you are using other people’s money to pay for only the cost of your debts, but not help you build equity. This way you still eliminate the full cost of your mortgage. But you carry lower risk compared to a full MIC manoeuvre because you are borrowing less money.
My experience with the MIC manoeuvre
I’ve been using the MIC manoeuvre for many years, slowly adding to my MIC positions over time. I started by borrowing money from my HELOC and then from my margin trading account. Today all my debt associated with the MIC maneuver has been paid off. And I am left with $39,000 of MIC funds generating a blended 7.8% yield. All my MICs are held in tax advantaged accounts and I currently receive about $3,000 a year this way.
Meanwhile the mortgage on my principal residence costs me about $2,900 per year in interest.
My MIC income covers my entire mortgage interest. So I am currently operating a MIC Manoeuvre lite. 🙂
It’s so nice to have other debtors pay the cost of my mortgage. Eventually I hope to grow my MIC portfolio until it’s large enough to cover my entire mortgage payment, including the principal portion. That way I can effectively live a mortgage free lifestyle! 😃
Potential Risks with the MIC maneuver
There’s no such thing as a free lunch when it comes to personal finance. So here are some potential pitfalls to watch out for when operating the MIC manoeuvre.
- Investment risk. – Just like any other business a MICs value can fluctuate over time. They can even fail and go bankrupt. That’s why it’s important to choose MICs with strong balance sheets, and conservative lending policies.
- Leverage risk. – Borrowing to invest can magnify both the gains and losses. But having a long term investment horizon, and investing in only profitable assets will significantly lower this risk.
- Real estate market risk. – If real estate prices fall too much, the MIC may not recoup all of its money through the foreclosure process. Fortunately you can invest in MICs with low loan-to-value ratios to mitigate this risk. For example, Timbercreek (TF.TO) has a maximum LTV of 65% for its long term loans.
You can reduce any of these risks if you conduct your due diligence and understand what you’re doing. Some people might tell you that investing in mortgages is inherently risky. Don’t listen to tools on the internet who don’t know what they’re talking about. 😬 The delinquency rate for all mortgages in the country was just 0.18% last year, which is reassuringly low.
Here are 3 main takeaways from the MIC manoeuvre:
- It lets other people subsidize your mortgage payments, freeing up your own cash.
- It doesn’t require any cash savings. All costs associated with this strategy are built into the process so it’s completely self sustaining. It uses the value of your own home & doesn’t require external capital to operate.
- When you eventually pay off the loan portion of this strategy you will have a free and clear MIC portfolio. You can either keep these MIC funds and continue earning passive income, or sell it to receive a lump sum windfall. 💰
Just because I’m using the MIC manoeuvre, doesn’t mean it’s suitable for everyone. Leverage can be risky and you could lose all your money. Consult a professional before making any financial decisions as this blog is for entertainment purposes only.
Have you guys considered using either the MIC manoeuvre or Smith manoeuvre before? Do you think these types of financial strategies would still work in a higher interest rate environment? Leave a comment below if you have any thoughts. 🙂
Random Useless Fact:
In 1949, an official boxing match was held between a bear and a man. The bear won.