Difference between a pledge and a guarantee

Some South African banks have adopted a two phase method of giving approval for a mortgage bond and this is in some cases causing confusion, says Rob Lawrence, national manager of Rawson Finance.

The banks’ practice, said Lawrence, is to give the applicant a written “pledge” indicating that he has, as a result of a preliminary investigation into his financial position, pre-qualified for a bond worth so much but it should be noted that such a pledge is in no way a guarantee that the bank will grant a bond.

The buyer in most cases will inform the agent and the seller of this and will then make an offer subject to the bond actually being granted.  Many people will assume that this is now a mere formality as, despite the fact that there are disclaimers on the pledge , they assume that such a pledge indicates that the bank has approved the loan in principle.

When the bond is actually applied for, the bank will undertake a second, more detailed study of the applicant’s financials and this, says Lawrence, could then – in many cases actually does –lead to a change of mind with the result that the bond is declined.

“The bank will already have checked the applicant’s credit record – but now they may reassess the nature and scale of his income.  Possible fluctuations in earnings or the fact that he is in what they consider a non-core business, or other factors, could lead to their now deciding not to become involved.”

The bank may also decide on, inspection, that the house as overvalued.

This, said Lawrence, had led to a “lot of grief and some anger” among applicants, agents and sellers.

“I am not sure what the answer is,” said Lawrence, “but it is, I feel, important to warn all involved that a pledge is not binding on the bank and should not be allowed to give the bond applicant or the seller too much confidence.”

At Rawson Finance, said Lawrence, the national success rate of bond applications is still under 55% but, he said, the 0,5% additional drop in the interest rates, now widely expected, will probably raise this figure by at least 3 or 4% – not so much because of the monetary value of the reduction, but because of the positive sentiment that another rate drop is likely to create.

For further information contact Rob Lawrence on 021 658 7100 or email rob@rawsonfinance.co.za.