MBS deliver higher yields than many bonds: even better, mortgage-backed securities also rank close to government bonds when it comes to safety

Fixed income investors tend to buy investments that are traditionally considered safe, such as Government of Canada bonds. This is understandable given that people who depend on the interest received do not want to lose their capital.

Mortgage-Backed Securities (MBS) offer somewhat higher yields, although they come close to government bonds when it comes to safety. When you buy an MBS, you are actually investing in a pool of residential first mortgages. Your return will depend on the mortgages in which your pool of money is invested.

MBS are like bonds. So your yield will depend on fluctuations in the current interest rates.

The difference between five-year government bonds and five-year MBS is about 0.15% to 0.20%. You can buy MBS with terms at of to 25 years. (For some of their current yields, see page 10).

Both the principal and the interest are guaranteed by Canada Mortgage and Housing Corporation. There is no limit to the guarantee provided.

MBSs are RRSP eligible and provide regular monthly income. The minimum investment is $5,000.

What you should know

You should know two things about MBS. First, the value of MBS will rise and fall inversely with interest rates. When interest rates rise (if you want to sell), you will get a lower price for your MBS. Conversely, when interest rates fall (if you want to sell), you will get a higher price.

The second point to remember is that the monthly payment you receive is not all interest payment. It also includes some payment of your principal. So if you do not want to use up your principal, you should reinvest the principal.

MBS offer an effortless and safe way for investors to increase the yield on their fixed income investments.