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Definition: Participation Mortgage
Participation Mortgage is a type of mortgage loan in which two or more persons (can be lender) have share in part of income or resale proceeds. In this type of mortgage, the lender has a right to gain from rental or resale of mortgaged property owned by the borrower.
Also participation mortgage is a kind of mortgage that can be offered by more than one lender. There is another concept of participation mortgage which may or may not require the payment of interest and principal amount.
This kind of mortgage might not include balloon payment. Some of the highlights about participation mortgage are:-
• Partial Equity – It means that lenders have partial interests in the mortgaged property.
• Financial Vehicle – Participation mortgage offers good value for long term financing. Generally participation mortgage is employed by borrowers who are in business of building or buying industrial or commercial property.
• Low Risk Investment – This is a form of low risk investment as various lenders are involved. Hence as profits are shared there is low risk in defaulting of loans.
Taking an example to understand participation mortgage better, let Mr. John takes a mortgage loan for a property which is divided into 3 parts. The parts are given for rent and Mr. John also pays some part of his rental income to the lenders in addition to principal and interest on the amount borrowed. Since the lender is participating in getting income from rental this kind of mortgage is called participation mortgage.