The participation mortgage is a kind of mortgage that is offered by one or more than one lender. According to the principle of participation mortgage, the lenders enjoy the share that is obtained from the resale proceeds. Another concept of participation mortgage is that it may require or may not require the payment of principal and interest amount. A participation mortgage may not include balloon payment.
In other words, the participation mortgage actually allows the mortgagee or the lender to have share in the property resale proceeds or in the rental of the property that is owned by the mortgagor or borrower. It is also said that participation mortgage makes the mortgagor to have share in the resale of goods or in the income of borrower.
For example, let us suppose that Mr. Andrews takes a mortgage loan for a property that is divided into 3 units. The units are given for rent and he pays some percentage of the funds that he earns from the rental to the lender in addition to the payment of principal and interest. Since the lender is participating in the income of the borrower, this process of mortgage is called participation mortgage.
Some of the prime features of participation mortgage are:
Partial Equity – In case of the participation mortgage, the lenders possess partial equity interest in the mortgaged property.
Financial Vehicle – Participation mortgage is considered to be an excellent financial vehicle. This offers a good medium for financing for a long term period. The use of participation mortgage is mainly enjoyed by the borrowers who are involved in the business of building or buying industrial or commercial property.
Competitive Interest Rate – Participation mortgage provides competitive rate of interest to the borrowers. In case of the participation mortgage, the rate of interest varies with the market trend.
Negotiable Loan Term – The borrowers can negotiate over the loan term in case of the participation mortgage.
Low Risk Investment – The participation mortgage is considered to be the low risk investment mortgage. The money of various lenders is pooled and included in the ‘portfolio of loans’ that reduces the risk associated with lending to each individual lender.
Multiple Ownerships – In participation mortgage, the ownership of a package of mortgages or a part of single mortgage is shared by one or more investors or lenders.
Mortgage Division Requirement – Participation mortgage needs the mortgage divisions into various units that are then sold to one or more than one lenders.
Last Updated on : 1st July 2013