Jul 202020
 

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. πŸ˜€

Get help with your mortgage payments for free.

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 manoeuvreΒ 

Why service a mortgage like a sucker when you can get others to do it for you instead?

 

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.

Step 1

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).Β 

Step 2

This is where the magic happens.πŸ˜‰ 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.

Step 3

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? 😁

 

Residual income

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. πŸ˜‰ 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. πŸ™‚

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. πŸ˜‰

 

Tax implicationsΒ 

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. πŸ˜‰

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.Β πŸ™‚

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! πŸ˜ƒ

 

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,Β which is reassuringly low.

 

Final Thoughts

Here are 3 main takeaways from the MIC manoeuvre:

  1. It lets other people subsidize your mortgage payments, freeing up your own cash.
  2. 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.
  3. 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. πŸ’°

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. πŸ™‚

 

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Random Useless Fact:

In 1949, an official boxing match was held between a bear and a man. The bear won.

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AlW
AlW
07/20/2020 3:50 pm

I too have been using this for many years (6+), though I’m buying entire private mortgages instead of MICs. A good MIC would yield 8% (with a 2% management fee) while a good private mortgage can yield 18%. The only additional risk is the lack of diversification that occurs with a private mortgage instead of a MIC. Additional pros would be direct ownership of the asset in lieu of owning shares in a corporation that owns the mortgage note. This is good if things turn to sh*t and you need to foreclose. As you mention it does turn into a bit of a tax nightmare but it’s sweet to essentially be paying off your house with someone else’s mortgage money. We make well over 100K in passive income yearly using private mortgages.

AlW
AlW
07/21/2020 3:12 am

Typically it’s interest only. You deal with clients whom are having credit issues but have good equity 50-60% LTV. Go through mortgage brokers instead of lawyers.

Paul Jones
Paul Jones
07/21/2020 9:05 am
Reply to  AlW

Wow never thought of this.

Robinson Smith
Robinson Smith
07/21/2020 7:32 am

The MIC manoeuvre as described in this article is the Prime the Pump accelerator of The Smith Manoeuvre. It is one component of the larger SM strategy. In my book, Master Your Mortgage for Financial Freedom, I describe the potential to pull equity out of your house at refinance into the appropriate mortgage in order to invest a lump sum immediately at outset of SM implementation. One can invest in stocks, bonds, mutual funds, Index funds or even MICs. The income generated by the MICs can, as you state and if one wishes, be used to cover the mortgage payment of the principal residence. Or the income can be used as monthly prepayments against the mortgage if one continues to service the regular mortgage payment out of pocket. What The Smith Manoeuvre then allows, which isn’t covered in the above, is the ability to reborrow ay principal reduction from the mortgage payment (or prepayments) and invest that amount as well, thus increasing your investment portfolio and your tax deductions. So the MIC manoeuvre is the Prime the Pump accelerator of The Smith Manoeuvre without the full continuation of The Smith Manoeuvre but can be a powerful way to turbocharge The… Read more Β»

Robinson Smith
Robinson Smith
07/22/2020 6:30 am

Hi LI. There’s a section in my book dedicated to the Prime the Pump accelerator. When you get to it, just replace ‘investment’ or ‘securities’ with ‘MIC’. If you were to pull equity to invest in MICs then you’re Priming the Pump with MICs, but correct, you could invest in anything that qualifies for deductible interest – thousands of Canadian homeowners are doing this. The principle is that if you are going to go through the process of qualifying for a straight non-readvancing HELOC for an equity take-out to invest (in MICs, if one wishes) as per the MIC manoeuvre, you may as well apply for a readvanceable mortgage so that the non-deductible mortgage debt you already have – whether a large amount or a small amount – can be converted from a non-deductible mortgage loan to a deductible investment loan. This way, apart from the lump sum investment in MICs and tax deductions that creates, you are also further getting the non-deductible mortgage balance principal reduction amount invested each month (this readvancing occurs automatically simply due to making a mortgage payment or any prepayments), you are generating additional tax deductions, and you are generating additional ability to prepay the… Read more Β»

Vancouver FI
Vancouver FI
07/29/2020 2:37 pm
Reply to  Robinson Smith

Do you have any suggestions on which banks offer re-advanceable mortgages or a HELOC which grows as you pay down your mortgage principle?

I’ve reached out to the big banks and the response is they don’t offer this type of product.

Robinson Smith
Robinson Smith
08/02/2020 7:12 am

LI’s got it, Vancouver FI. Also, Manulife One.

Paul Jones
Paul Jones
07/21/2020 9:08 am

I’ve never considered this maneuver. This is some big brain stuff. How many years into your mortgage can you pull this off? What is the difference between Smith and this maneuver?

HK
HK
07/21/2020 11:29 am

Great post as always. Two questions good sir.

1) If you are going to refinance to invest in the MIC – why not just use that $ as a downpayment for another property purchase? Have you done the analysis on MIC Manoeuvre vs buying another investment unit?

2) Are you still bullish on the same MICs that you previously profiled? and do you forsee any risks knowing the current market conditions in Real Estate and Cdn Debt levels + High Real estate prices?

Maria @ Handful of Thoughts
Maria @ Handful of Thoughts
07/22/2020 4:54 am

Although we invest in MICs this is the first time I’ve heard of the MIC maneuver.

I think it only works in unique circumstances because you need to have quite a bit of equity for the numbers to work. I also think that an 80% LTV HELOC is difficult to get. I thought that they were traditionally around 60-65%? Although it’s been a few years since we had a HELOC.

Interesting post. Thanks for making me think πŸ€”.

Robinson Smith
Robinson Smith
07/22/2020 6:33 am

Hi Maria – the big banks will lend up to 80% for a readvanceable mortgage which has the attached line of credit but the LOC component will max out at 65% LTV. Some other banking institutions (credit unions) are not subject to the 65% HELOC Rule imposed by OFSI in 2012 so you could get a LOC with a higher LTV.

AlW
AlW
07/23/2020 11:31 am

You don’t necessarily need a HELOC to do it. The money is made off the interest rate differentials. If you can borrow at 5% and loan out at 10% your spread is 5%. Theoretically you could even make money borrowing from a credit card at 19% and investing at 30% if you could find securities generating that type of cash.

Mack
Mack
07/31/2020 11:10 am

Hey Liquid – great post! Couple questions for you: When you pull from your HELOC you now have a monthly liability at let’s say 3% which you must make payments for. In order to perfectly offset this you must invest in a MIC that pays monthly dividends/interest otherwise you will have to pay the expense out of pocket until you receive a quarterly/annual dividend. Furthermore, if you are sheltering the investments in a TFSA/RRSP pulling funds out becomes cumbersome (primarily for a RRSP although now you are factoring in tax deductions created from investing). 1) Are you floating the monthly cash payments out of pocket until you are made whole from the dividend payments? 2) Why not leave the investments in non-sheltered accounts and deduct the full HELOC interest? Does it make sense to think about it in the following ways. Non-sheltered account – 6% (eg. income yield) – marginal tax rate (40%) = 3.6% – HELOC interest rate (3%) on a monthly basis but this is tax deductible and recoverable at year end. In this example there will be no cash outlay out of pocket MIC held in RRSP account – 6% (eg. income yield) – HELOC interest rate… Read more Β»

Mack
Mack
08/03/2020 2:08 pm

Thanks for the response Liquid!

If I hold the funds in the TFSA at least I can make monthly withdrawals if I wanted to make the payments from the investments but I agree one has to do the math to see which one is more punitive, marginal tax rate or cost of borrowing.

I’m trying to offset the payments as much as possible so leaving them in a non-registered account and keeping some extra cash aside for taxes at the end of year I think is my best bet.

harry
harry
08/05/2020 5:33 pm

LI
Would you invest every month to buy MIC from your borrowed money from margin and HELOC or wait for until you have 2-5k to invest to save on commission cost. .As per my understating TD charges $9.99 for each transactions.What are your thoughts?
Thanks

Last edited 1 month ago by harry
KSt
KSt
08/27/2020 10:07 pm

I also live in BC and invest in a local Mortgage Investment Company that is purely for bridge loans. I supply the loan and receive an average of 8% return upon the borrowers selling their old house and closing on their new house.
Is this similar to the investments you refer to with the Mortgage Investments you use, as this is still investing in debt?
I just havnt investigated if the bridge loan investment qualifies as tax deductible interest from the HELOC yet.