What is a drawdown?

Transferring money from a lending institution to a borrower is also known as “drawing down”. In a typical home loan, the funds are drawn down all at once to buy the property. In a construction loan, the money is drawn down in several stages to pay the builders as they progress through each phase of the project. In a line of credit loan, you can draw down money, up to a limit, based on your loan’s available equity. 

How is a standard home loan drawn down?

For most home loans, you draw down the money you borrow as a single lump sum on settlement day. This is when the property’s buyer and seller (or their solicitors or conveyancers) exchange contracts and transfer ownership of the property title.

As part of this process, the solicitors will contact your lender and arrange for the money from your home loan to be drawn down and paid to the vendor in exchange for the property. You will then have the rest of the home loan’s term (often 20 to 30 years) to pay back the mortgage principal plus interest in instalments.

How is a construction loan drawn down?

Money from a construction loan is drawn down in stages as the construction project progresses. The typical stages are:

• SLAB: Approximately 15-20 per cent of funds paid (may include a 5 per cent deposit to the builder)
• FRAME: Approximately 20 per cent of funds paid
• LOCK-UP: Approximately 20 per cent of funds paid
• FIT-OUT: Approximately 30 per cent of funds paid
• COMPLETION: The bank or their valuer will inspect at this stage before making the final progress payment of approximately 10 per cent of funds.

You will generally make interest-only payments on a construction loan, and only on the money that’s been drawn down so far. Once the project is complete, the loan will typically revert to a principal and interest home loan.

How do you draw down money from a line of credit?

A line of credit works a lot like a credit card with a maximum limit based on the usable equity in your property. This can be found by subtracting your remaining mortgage principal from 80% of your property’s current value (including any capital gains or losses).

You can apply for a line of credit when you refinance your home loan. The lender will likely need to organise a formal valuation of your property to accurately calculate your equity and work out your maximum credit limit.  Keep in mind that even if you have plenty of equity in your property, the lender may only be willing to let you access part of it as a line of credit.

Once your line of credit is set up, you can draw down funds using the methods offered by your lender, which could include via ATMs using a debit card, or electronic funds transfers via phone or internet banking. You’ll only be charged interest on any money you draw down until it’s repaid.

Compare home loans in Australia