You may have come across the term 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.
Should I make extra repayments on my home loan?
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 pay interest on the full loan amount once it has all been drawn. 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.
