Should you build or buy a home?

author-avatar By on May 22, 2020
Should you build or buy a home?

Photo by Markus Spiske on Unsplash

It’s the age-old housing debate, is it better to build or buy your own home?

For the time being, Australia appears to have flattened the curve and stopped the spread of COVID-19.

Lockdowns and restrictions have been rolled back, including the ban on open houses and auctions, paving the way for buyers and investors.

According to the Australian Bureau of Statistics, building approvals rose 1.3% in March, although this was before the worst of the pandemic restrictions had set in.

The hope then is some sense of normality will resume in the coming months.

So if you’re looking for a new home, should you build or buy?

Arguments can be made for both until the sun goes down (and longer), but we’ve tried to hone in on the key points to find the answer.

Buying a home or looking to refinance? The table below features home loans with some of the lowest interest rates on the market for owner occupiers.

Lender
Advertised rate Comparison rate Monthly repayment Rate TypeOffsetRedrawOngoing FeeUpfront FeesLVRLump Sum RepaymentAdditional RepaymentsPre-approval
VariableMore details
LIMITED TIME OFFER

Smart Booster Home Loan Discounted Variable - 2yr (LVR < 80%)

  • Fast turnaround times, can meet 30-day settlement
  • For purchase and refinance, min 20% deposit
  • No ongoing or monthly fees, add offset for 0.10%
LIMITED TIME OFFER

Smart Booster Home Loan Discounted Variable - 2yr (LVR < 80%)

  • Fast turnaround times, can meet 30-day settlement
  • For purchase and refinance, min 20% deposit
  • No ongoing or monthly fees, add offset for 0.10%
VariableMore details
WIN YOUR HOME LOAN INTEREST FREE

Nano Home Loans Variable Owner Occupied, Principal and Interest (Refinance Only)

  • WIN your home loan interest free and save up to $1.1 million. Refinance by 29 October. T&Cs apply.
  • Refinance Only. Fast online application, refinance in minutes, not weeks.
  • No Nano fees, Free 100% offset sub account. Mobile app. Visa debit card & instant payments.
WIN YOUR HOME LOAN INTEREST FREE

Nano Home Loans Variable Owner Occupied, Principal and Interest (Refinance Only)

  • WIN your home loan interest free and save up to $1.1 million. Refinance by 29 October. T&Cs apply.
  • Refinance Only. Fast online application, refinance in minutes, not weeks.
  • No Nano fees, Free 100% offset sub account. Mobile app. Visa debit card & instant payments.
VariableMore details
YOU COULD WIN $100k TO PAY DOWN YOUR LOAN*

Owner Occupier Accelerates - Celebrate (LVR < 60%) (Principal and Interest)

  • For a chance to win $100K towards your home loan, apply with Athena before Oct 31 & be approved by Dec 15
  • We lower your rate based off how much you’ve paid down your loan
  • Automatic rate match
YOU COULD WIN $100k TO PAY DOWN YOUR LOAN*

Owner Occupier Accelerates - Celebrate (LVR < 60%) (Principal and Interest)

  • For a chance to win $100K towards your home loan, apply with Athena before Oct 31 & be approved by Dec 15
  • We lower your rate based off how much you’ve paid down your loan
  • Automatic rate match
VariableMore details
AN EASY ONLINE APPLICATION

Yard Home Loan (Principal and Interest) (Special) (LVR < 70%)

  • Unlimited additional repayments
  • Unlimited free redraws
  • Optional 100% offset can be added for $120 p.a.^
AN EASY ONLINE APPLICATION

Yard Home Loan (Principal and Interest) (Special) (LVR < 70%)

  • Unlimited additional repayments
  • Unlimited free redraws
  • Optional 100% offset can be added for $120 p.a.^
VariableMore details
100% FULL OFFSET ACCOUNTNO APPLICATION FEE OR ONGOING FEES

Low Rate Home Loan - Prime (Principal and Interest) (Owner Occupied) (LVR < 60%)

  • No upfront or ongoing fees
  • 100% full offset account
  • Extra repayments + redraw services
100% FULL OFFSET ACCOUNTNO APPLICATION FEE OR ONGOING FEES

Low Rate Home Loan - Prime (Principal and Interest) (Owner Occupied) (LVR < 60%)

  • No upfront or ongoing fees
  • 100% full offset account
  • Extra repayments + redraw services

Rates correct as of September 28, 2021. View disclaimer.


Is it cheaper to build or buy a home?

There are so many differing opinions on whether building a home or buying one is the way to go but for the majority of people, the biggest deciding factor in any decision comes down to money.

A house will typically be the most expensive thing a person owns in their life, so the cheaper option will often be the more popular option.

Let’s first look at the cost of building a home.

It’s hard to overstate just how difficult it is to pinpoint how much it costs to build a house.

The Urban Development Institute of Australia’s (UDIA) annual State of the Land report for 2020 revealed the median costs and lot sizes across the country.

Using their data, we can see the median cost of buying a lot of land across the capitals in the table below.

Sydney unsurprisingly had the most expensive median lot price, followed closely by the Australian Capital Territory, while Adelaide had the cheapest median lot price.

Data for Hobart and Darwin was not recorded.

While building a home doesn’t require you to pay stamp duty on the building itself, it is required on a lot of land, which, as evidenced in the table below, can be extremely costly.

First home buyers are eligible for exemptions on stamp duty, with differing legislation across the states, which you can check out here.

City

Median lot price

Stamp duty

Sydney

$459,000

$16,374

Melbourne

$327,000

$13,685

Brisbane

$327,000

$10,794

Adelaide

$180,000

$7,617

Perth

$217,000

$6,935

ACT

$423,000

$9,344

National average

$322,000

$10,792

Source: UDIA, Stamp Duty Calculator Australia

While it’s relatively easy to find the cost of a lot of land, the exact cost of building a home can vary massively,

Data courtesy of Rider Levett Bucknall detailed Australia’s construction building costs from the 2018 fourth quarter for custom-built, single and double-storey dwellings.

As seen in the table below, Victoria had the highest build cost at $423,808, while South Australia was the cheapest at $314,736.

City

Lower range cost per sqm

Average floor area m2

Low range total cost

NSW

$1,780

220.5

$392,490

VIC

$1,720

246.4

$423,808

QLD

$1,800

231

$415,800

SA

$1,580

199.2

$314,736

WA

$1,400

236.5

$331,100

ACT

$1,700

242.5

$412,250

National average

$1,633

229.4

$381,697

Source: Rider Levett Bucknall’s Riders Digest 2019 Melbourne, Australia Edition

It’s important to understand these figures are an extremely rough estimate and should be treated as such. They don’t take into account if the land needs to be levelled, use high-quality materials or accessories, delayed timeframes, and a plethora of other factors that come with building a home.

So using our very rough estimates, we can garner an idea of how much it would cost to build a house in Australia by totalling the median lot cost, stamp duty, and low range cost of the build.

As seen in the table below, Sydney marginally comes in as the most expensive place to build a home, followed closely by the Australian Capital Territory, with Perth by far the cheapest.

City

Total build cost

Sydney

$867,864

Melbourne

$764,493

Brisbane

$753,594

Adelaide

$502,353

Perth

$554,935

ACT

$844,594

National average

$714,489

We can then compare these total cost of building estimates to median housing values to gain an insight into which roughly may be cheaper.

CoreLogic figures for April, released in May, reveal the median house prices for the capitals as well as the national average.

Comparing them in the table below with the total build cost estimates, we can see the only capital city it's cheaper to build in is in Sydney.

The national average suggests it could be around $90,000 cheaper to buy than it is to build.

Again, these are extremely rough estimates and by no means should cost be the only deciding factor in whether you build or buy.

These figures are also based off of the capital cities, with figures not easy to find for regional areas, and as a result, it may be cheaper to build rather than buy or vice versa, in regional areas across the country.

City

Total build cost

Median housing value + stamp duty

Which is cheaper?

Sydney

$867,864

$925,761

Build

Melbourne

$764,493

$734,423

Buy

Brisbane

$753,594

$518,584

Buy

Adelaide

$502,353

$461,972

Buy

Perth

$554,935

$464,108

Buy

ACT

$844,594

$644,445

Buy

National average

$714,489

$624,882

Buy

Source: CoreLogic


Pros of building a home

There are a number of advantages that come with building a home compared with buying one, which include:

1. Personalisation

Building a home from scratch will typically mean you’re involved in each step: finding and buying a lot of land, choosing your builder, deciding how many storeys there are, bedrooms, bathrooms…the personalisation options are endless. The construction and building industry are partly so massive because of the variety of homes and features available. If you want to build a ten pin bowling alley in your house and have the funds to do so, you can! Finding a house that meets your every need can be far more difficult when simply buying an existing home.

Additionally, choosing higher-quality materials means there’s less chance of your home requiring maintenance down the line, as well as improving the value of your home. In contrast, an established home may have existing maintenance issues prior to your arrival.

2. First Home Owners Grant

The First Home Owners Grant (FHOG) eligibility and payments differ between states and territories. However, the one constant is that it’s available for those building a home. Homebuilders can expect to receive at least $7,000 from the state or territory government to assist them in paying for the building which can hugely help when saving for a deposit. The FHOG is also available to those buying a brand new home.

3. Stamp Duty

As evidenced above, stamp duty costs can rack up into the tens of thousands of dollars. If you’re a first home buyer then you may be eligible for a concession but many people aren’t in this boat. Building a home means you only have to pay stamp duty on the lot of land and not the property itself. To show you how much that can make a difference, let’s take Sydney as a case study.

Building on the median $459,000 land lot in Sydney will mean you have to pay around $16,000 in stamp duty on the land. In comparison, buying an established property in Sydney at the median price of $889,000 will cost you around $35,000 in stamp duty, more than double what you would pay if you built.

4. Energy efficiency

Part of the personalisation aspect of building a home means you can choose the materials, lighting, and cooling used throughout the home. Choosing energy efficient options when building your home can save you thousands on electricity and gas costs. High-quality materials like double glazed windows and doors will block out noise and reduce heat penetration by up to 40% compared to standard glass. While installing solar may be expensive upfront, it could help you save on energy bills in the long run.


Cons of building a home

As many positives there are for building a home over buying one, there are a number of negatives too, which include:

1. Time

Unless you’ve signed up to a ‘Block-esque’ type show, where they build your home in under a week, chances are your build will take time and lots of it. While buying a home means you can move in upon completion of finance and paperwork, building a home could take anywhere from six months to a year, or even longer. That could mean spending money on rent in that time or living in a place you hate.

2. Construction loans

construction loan is a specific type of home loan designed to assist the funding of a new home’s construction. Although construction loans are great for when you’re building home, when compared with normal home loans, they have a number of downsides. Most notably, they typically have higher interest rates, which could cost you more over the life of your loan. Furthermore, they can have higher fees, require a larger deposit and they don’t tend to function as a normal home loan does, drawing out the process through financial red tape.

Lender
Advertised rate Comparison rate Monthly repayment Rate TypeOffsetRedrawOngoing FeeUpfront FeesLVRLump Sum RepaymentAdditional RepaymentsPre-approval
VariableMore details
GET A DISCOUNTED GREEN RATE

Green Construction Home Loan (Interest Only)

  • Interest Only during construction
  • No monthly, annual or ongoing fees
  • Get Australia’s lowest rate construction loan when you go green
GET A DISCOUNTED GREEN RATE

Green Construction Home Loan (Interest Only)

  • Interest Only during construction
  • No monthly, annual or ongoing fees
  • Get Australia’s lowest rate construction loan when you go green
FixedMore details
NO UPFRONT OR ONGOING FEES

Basic Home Loan Fixed (Principal and Interest) (LVR < 70%) 3 Years

NO UPFRONT OR ONGOING FEES
FixedMore details

Fixed Rate Home Loan 2 Years

VariableMore details

Construction Home Loan (LVR < 80%)

  • Fast turnaround times, can meet 30-day settlement
  • No ongoing fees
  • Unlimited extra repayments

Construction Home Loan (LVR < 80%)

  • Fast turnaround times, can meet 30-day settlement
  • No ongoing fees
  • Unlimited extra repayments

Base criteria of: a $400,000 loan amount, variable, fixed, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. However, the ‘Compare Home Loans’ table allows for calculations to made on variables as selected and input by the user. All products will list the LVR with the product and rate which are clearly published on the Product Provider’s web site. Monthly repayments, once the base criteria are altered by the user, will be based on the selected products’ advertised rates and determined by the loan amount, repayment type, loan term and LVR as input by the user/you. Rates correct as of September 28, 2021. View disclaimer.

3. Factors out of your control

The elements are fickle creatures and something humans have no control over (yet). If it rains for three weeks solid at your build site, then construction will be halted, lengthening the time it takes to build your home and costing you money. Delays could also come as a result of poor workmanship, equipment failures, labour shortages and council approvals.

4. Outside of the CBD

This article has mainly focused on the building of a house on a vacant lot of land. Chances are you won’t be able to embark on such an endeavour in the heart of a CBD or on its outskirts. Cities are typically apartment-orientated, which buyers can easily move into. Building a property may require you to look further out into suburbia to build your dream home.


Pros of buying a home

Buying a home over building a home has a number of advantages, which can include:

1. Convenience

Finding a home to buy can be as easy as going online and scrolling through properties as if you were looking for an interesting YouTube video to watch. In today’s age, you can buy a property without ever seeing it in person and complete the whole process online. Some lenders now boast they can process loan applications in a matter of hours, which means once you sign off, you could be in a new home only a week after finding it. Of course, this is hypothetical and things are rarely that easy, but compared to building a home, buying one is often a vastly more streamlined process.

2. Location

As Australia’s population swells, so too does the amount of housing built. For those who wish to build, spots to do so are fast drying up in cities and even regional areas. Buying an established home means you can choose your desired location with ease, without being restricted by the size or type of property.

3. Lower financing costs

Financing can be much simpler when buying a home compared to building a home. While a 20% deposit is typically favoured, many lenders will allow you to borrow up to 95% of the property’s value (provided you pay Lenders Mortgage Insurance). As well as often having lower interest rates than construction loans, normal home loans also have the advantage of a greater variety of loans (fixed or variable) as well as a larger range of lenders for you to choose from.

4. You know what you’re getting

It’s true building a home means you get to personalise much of the property, but things rarely turn out the way they’re supposed too. There are often hitches, miscommunications and mistakes which mean your gold plated bath turns into a copper toilet. When buying a home you know exactly what you’re getting, especially if you have an inspector look at the place prior to purchase (which is a must).


Cons of buying a home

As good as it can be buying a home over building one, there are downsides which include:

1. Wear and tear

Buying an established property means someone else will have lived in it. That will mean some degree of wear and tear which you’ll bear the brunt of. Wear and tear will only be more prevalent and increase over time with older properties like old Queenslanders, which will see you potentially have to foot a hefty repair bill. Older houses may also have higher electricity costs due to poor insulation and fewer energy efficient options.

2. Higher Government fees

As seen above, stamp duty can cost you tens of thousands more when buying a home over building one. Furthermore, if you’re a first home buyer, state governments are less likely to help you with the purchase of an established home. Most states only provide grants to those buying or building a brand new home.

3. Unavailable features

Building a home means you can install all sorts of wild and interesting features. Such features won’t be available in many established properties, so you’ll be restricted in your searches. While features such as a bowling alley will obviously not be readily available, features like a pool or two-car garage may be hard to find in your desired location.


Savings.com.au’s two cents

Chances are even prior to reading this article you knew whether you were going to build or buy your home.

It’s an innately personal decision, with some people dreaming of building their perfect home their entire life, while some people simply want somewhere they can move into quickly which suits their needs.

Whatever decision you make, its important to understand the costs involved with each process. Additionally, compare the pros and cons to nail down which avenue is best for you.

From a money perspective, the numbers in this article should be used as an extremely rough estimate to gain an idea of how much each option will cost. Consider consulting a qualified financial adviser before making any major decisions.


Disclaimers

The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered which includes retail products from at least the big four banks, the top 10 customer-owned institutions and Australia’s larger non-banks:

  • The big four banks are: ANZ, CBA, NAB and Westpac
  • The top 10 customer-owned Institutions are the ten largest mutual banks, credit unions and building societies in Australia, ranked by assets under management in November 2020. They are (in descending order): Great Southern Bank, Newcastle Permanent, Heritage Bank, Peoples’ Choice Credit Union, Teachers Mutual Bank, Greater Bank, IMB Bank, Beyond Bank, Bank Australia and P&N Bank.
  • The larger non-bank lenders are those who (in 2020) has more than $9 billion in Australian funded loans and advances. These groups are: Resimac, Pepper, Liberty and Firstmac.
  • If you click on a product link and you are referred to a Product or Service Provider’s web page, it is highly likely that a commercial relationship exists between that Product or Service Provider and Savings.com.au

Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site.

In the interests of full disclosure, Savings.com.au, Performance Drive and Loans.com.au are part of the Firstmac Group. To read about how Savings.com.au manages potential conflicts of interest, along with how we get paid, please click through onto the web site links.

*Comparison rate is based on a loan of $150,000 over a term of 25 years. Please note the comparison rate only applies to the examples given. Different loan amounts and terms will result in different comparison rates. Costs such as redraw fees and costs savings, such as fee waivers, are not included in the comparison rate but may influence the cost of the loan.

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author-avatar
Alex joined Savings.com.au as a finance journalist in 2019. He enjoys covering in-depth economical releases and breaking down how they might affect the everyday punter. He is passionate about providing Australians with the information and tools needed to make them financially stable for their futures.

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