What is a drawdown loan?

Ever wondered a drawdown means? In simple terms a loan drawdown is the release of funds under an agreement with a lender.

When it comes to home loans , ‘drawdown loan’ means you are using the money the lender provided to buy the property. Lenders use this term to describe when your loan is actually paid to you, usually on settlement of the property.

On the other hand, with a construction loan , money is drawn down in multiple payments as the builders complete different stages of the construction project.

Accessing your home loan on settlement day

Settlement day typically occurs after you’ve paid your deposit and completed the contract that makes you the new homeowner. On this day your solicitor will arrange with the vendor’s solicitor and communicate with your lender to organise the drawdown of the remaining funds to pay for the property.

For example, Ana and Kate recently bought their first home for $700,000. After paying their $140,000 deposit and receiving the final contract, Ana and Kate have five weeks until their settlement date. They follow the Mozo how to buy your first home guide and conduct their due diligence of inspecting the property and getting financial approval. Come the official settlement date, Ana and Kate’s lender will draw down the remaining $560,000 to pay the vendor. Then they will become the official homeowners of the new property.

Construction loan and drawing down in stages

How do drawdown loans work for construction loans ? Well it uses progressive drawdowns, where you can draw on your construction loan as needed throughout the different phases of construction. A typical construction loan drawdown consists of five to six stages.

Since, you’ll be borrowing money by increments you’ll typically only pay interest on the amount of the loan you’ve drawn down so far.

For example, Amy and Rosa got approved for a $300,000 construction loan but have only drawn down $20,000 so far: they’ll only be charged interest for the $20,000. If later in the construction stages Amy and Rosa draw $30,000 for the next phase of the construction, then they’ll be charged interest on $50,000. It continues that way until the complete loan has been used.

If you find yourself overwhelmed with all the home loans jargon check out Mozo’s Home Loan Glossary where we simplify and define all those fancy home loan terms.