The 21-year-old Irishman scored against Lee Clark's side when on loan Bournemouth in the first leg of last season's play-off semi-finals.
An attack-minded midfielder, McDermott can operate on the flanks or behind a main striker.
Clark said: "Donal has been on our radar for a long time; in fact, he was one of the targets we were looking at when we signed Danny Ward on loan.
"At that time he was just recovering from an injury and was undergoing rehab at Man City, and given how quickly we wanted a replacement we went for Danny, who was very successful here. Every time he has come up against us, he has just enhanced his reputation with very good performances.
"We're delighted to have him - he adds competition to the wide areas and can also play just behind the strikers too, so he has good versatility."