A mortgage is a loan, secured by real estate. It is not real estate. However, a mortgage is a fairly safe way to invest in real estate, but you do not participate in the overall performance of the real estate through this financial instrument. Your TFSA or RRSP becomes the lender. You are the bank.
You can hold:
a single mortgage
a share in a single mortgage, called a syndicated mortgage
shares in a MIC, a Mortgage Investment Corporation. An MIC pools many mortgages and allows the individual investor to co-own a share of multiple mortgages in their RRSP or TFSA.
The risk of this investment, namely payment default by the borrower, has to be compared to the fixed return of this investment. The fixed return over time can vary from a low of perhaps 4% to usually in the high single digit range to perhaps the lower double digit range for more risky assets.
A second consideration is if the mortgage is on a to-be-constructed property or an existing property. As a broad rule of thumb, a to-be-constructed property carries a much higher risk of non-payment, as the development of the property has not yet occurred, thus reducing the ease with which the lender could sell it if necessary. The interest rate on this mortgage should be much higher to compensate for this additional risk. Consider return OF your capital before you consider return ON your capital when evaluating this first type of RRSP or TFSA eligible investment option.
A tertiary consideration is the position of your mortgage on the property title. If you are in 1st position, and the mortgage is unpaid, you are first in line to get paid from a foreclosure action. Even then loss of capital is possible, especially in a construction mortgage. If you are in 2nd or in 3rd position, other lenders get paid first. Thus, the risk of non-payment increases with the increase in position on title. Some trustees or MICs don’t allow 2nd or higher position mortgages, but some do. Therefore, before you invest, do your homework on the risk of the loan and then gauge whether the offered interest rate compensates for this risk.