A New Buyer's Guide: Using the 5% Deposit Scheme for an Existing Home vs. a New Build

The government's 5% deposit scheme is one of the most powerful tools available to first home buyers in Australia. It dramatically lowers the upfront cash needed, turning the dream of homeownership into a reality years sooner. However, the path isn't a straight line. Your first major decision—whether to buy an existing, established home or to buy land and build a new one—has significant financial and lifestyle implications.

This guide is designed for the absolute beginner. We'll walk you through both paths, explain the confusing parts like stamp duty and grants, and give you the clarity you need to make the right choice for your future.

The Big Decision: Buy or Build?

The 5% deposit scheme supports both options, but they are very different experiences. Let's break them down.

Path A: Buying an Established Home

This is the traditional route most people think of. You find a house or apartment that's already built, you agree on a price, and you get a standard home loan to cover the purchase.

How the Process Works:

1. Get Pre-Approval: Talk to a mortgage broker to see how much you can borrow.
2. House Hunting: Find a property you love in your price range.
3. Make an Offer: Once your offer is accepted, you sign a contract of sale for a single, fixed price (e.g., $700,000).
4. Final Loan Approval: Your lender assesses the property and gives you final approval. The 5% deposit scheme is applied here to help you avoid Lenders Mortgage Insurance (LMI).
5. Settlement: You pay your deposit, the bank pays the seller, and you get the keys!

The Pros:

• Simplicity: It's a straightforward process with one property, one contract, and one loan.
• Speed: You can move in as soon as the sale settles, usually within 30-90 days.
• Certainty: You know exactly what you're buying and what it will cost. There are no risks of construction delays or cost blowouts.

The Cons (The Big One: Stamp Duty):

• Higher Stamp Duty: Stamp duty (a state government tax) is calculated on the full purchase price of the property. If you buy a house for $700,000, you pay stamp duty on $700,000 (though first home buyer concessions may reduce this).
• Less Customisation: What you see is what you get. Renovations are an additional, future cost.

Path B: Building a New Home

This path involves two main stages: first buying a block of land, and then signing a contract with a builder to construct a house on it. This is typically financed with a "construction loan."

How the Process Works:

1. Get Pre-Approval: This is crucial. A broker will help you figure out your total budget for both land and construction.
2. Buy Land: You purchase a block of land, which settles just like an established home. You now own the land.
3. Choose a Builder: You sign a separate, fixed-price building contract.
4. Final Loan Approval: The lender assesses the land value and the building contract. Your loan covers the cost of construction.
5. Construction Begins: The loan is paid out to the builder in stages (e.g., after the slab is poured, the frame is up, etc.). You make interest-only payments on the amount drawn down during this time.
6. Handover: Once the house is finished, you get the keys, and your loan converts to a standard principal-and-interest mortgage.

The Pros (The Big One: Stamp Duty Savings):

• Major Stamp Duty Savings: This is the key advantage. You typically only pay stamp duty on the value of the land, not the cost of the house being built on it. This can save you tens of thousands of dollars.
• First Home Owner Grants (FHOG): Most states offer much more generous grants (e.g., $10k, $20k, or even $30k) for new builds compared to established homes.
• A Brand-New Home: You get a modern home built to the latest standards, with a warranty, and tailored to your tastes.

The Cons:

• Complexity: You are managing two large contracts (land and build). The loan process is more involved.
• Longer Timeline: It can take 6-18 months from buying the land to moving in. You may need to pay rent during this time while also making interest payments on your construction loan.
• Intense Documentation: The bank will require a huge amount of paperwork: council plans, building contracts, builder's insurance, invoices for each stage, etc. Being organised is not optional.

Stamp Duty Example: The Difference in Black and White

Imagine a total property value of $700,000 in NSW (ignoring first home buyer concessions for this simple example):

• Path A (Established Home): You buy a house for $700,000. Stamp duty is calculated on the full **$700,000**.
• Path B (New Build): You buy land for $350,000 and the build costs $350,000. You only pay stamp duty on the land value of **$350,000**. This is a massive saving.

Stacking Your Benefits: How Schemes Work Together (State by State)

The best part is that these schemes can often be combined. It's possible to use the 5% deposit scheme to avoid LMI, receive a First Home Owner Grant for building, AND get a stamp duty concession. This "stacking" of benefits is what makes building so attractive to many first home buyers, but it requires careful planning with a broker to ensure you meet the eligibility criteria for each scheme in your state.