What is a loan drawdown?

A drawdown loan, sometimes known as a drawdown facility, is the release of an amount of money under an agreement with a lender.
Ava Crawford
Imogen Baxter
Couple smiling enjoying their new home paid for with a drawndown loan

phrasing of a loan drawdown or drawdown loan. With so much confusing terminology floating around the financial services world, it’s important to understand the concepts you might be getting involved with.

A drawdown loan, sometimes known as a drawdown facility, is the release of an amount of money under an agreement with a lender.

You’ll most commonly hear this spoken about with regard to long-term loans like home loans and specific projects like construction loans.

With a loan drawdown, a loan agreement is made where payment is released in some other configuration rather than releasing the full loan amount at once. Amounts are drawn from the loan rather than a borrower receiving a full lump sum.

How does a home loan drawdown work?

On a home loan, how does this look? Instead of releasing funds directly to a borrower, they are generally released from the lender to the party being purchased from on settlement day. Alternatively, you might receive instalments of the home loan rather than a single lump sum.

With such a high-value purchase, like real estate, a drawdown prevents large amounts of money from changing hands an unnecessary amount of times and is safer for your loan amount and for the home loan provider.

How does a construction loan drawdown work?

With a construction loan, rather than receiving the entire loan into your debit card or bank account, it will generally be released in instalments to make different payments over the course of the construction. These instalments are drawn from the loan account until it’s depleted.

There will generally be a set period of time in which you can make your drawdowns.

Why would I draw down on a construction loan?

If you know your financial situation and know you aren’t the best at money management, a drawdown can help prevent you from spending the loan amount on unrelated expenses before using it elsewhere.

When it comes to paying interest, you can only pay interest on money that you have borrowed. Until money is released to you, you may have a loan account, but you haven’t actually borrowed that money. This means that a progressive drawdown could save you on interest repayments, as you only pay interest on the money once it is released to your bank account.

Remember that you will still need to pay interest on the full loan amount. The difference will be that interest accumulates over time, so avoiding paying it on a large lump sum for the full period of time may be beneficial to you in decreasing interest payments.

A progressive drawdown construction loan allows more flexibility than, for instance, paying for individual contractors on credit cards. You could land with huge amounts of interest if you weren’t to make your repayments in full.


If you want to know how your drawdown facility works or you are considering a drawdown, make sure to consider the product disclosure statement and make plans for how you plan to draw down from the loan account.

FAQs

What is loan-to-value (LVR)?

LVR is the loan-to-value ratio of your home loan. That is the amount that you borrow to the amount of deposit that you have paid. In refinancing, this can also refer to your home equity.

Home loans with an LVR of under 80% (a deposit of 20% or greater) tend to be seen as lower risk by lenders, lower interest rates. You tend to have more home loan options with a higher deposit.

Home loans with an LVR of above 80% can do the reverse. It can be harder to gain approval, and interest rates can be higher.

How is drawdown different to disbursement?

While a loan drawdown has funds from a loan, disbursement means paying out money. Disbursement in a home loan context usually refers to the costs that must be paid during the conveyancing process, like valuation and title transfer.

They are commonly confused, probably because they both start with “d” and refer to the movement of money!

Where else are drawdowns used?

Are drawdowns used in any other contexts?

It’s easy to get confused regarding loan drawdowns because the term drawdown is used in other facets of finance. For clarity, look at the specification of a loan drawdown or draw-down facility. Otherwise, you’ll also find drawdown talk in discussions of withdrawing money from retirement accounts or in the talk about gains and losses for investments.

How does a loan drawdown facility impact me as a first-home buyer?

If you’re a first-home buyer looking to understand how the drawdown will impact you, the main consideration will be if you are looking for a construction loan to build a home. All of the above information will be relevant in this case, with the drawdown facility adding flexibility.

You may also still be eligible for first home buyers support schemes, like the First Home Owners Grant and the First Home Loan Deposit Scheme. These are only for owner-occupier home loans, and other criteria may apply.

Disclaimer
This article is intended to be general in nature and is not personal financial product advice. It does not take into account your objectives, financial situation, or needs. In particular, you should seek independent financial advice and read the relevant product disclosure statement (PDS), or other offer documents before making an investment decision in relation to a financial product (including a decision about whether to acquire or continue to hold).
Prepared by OwnHome Services Pty Ltd ACN 664 492 059. This information does not take your personal objectives, circumstances or needs into account. Always read the disclosure documents for products and services before deciding on a product or service, and consider seeking independent legal, financial, taxation or other advice for your unique circumstances.
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