About 84 per cent of homes sold fall under the $1.5 million threshold for the scheme, which the government hopes to introduce by January.
It's part of the government's $2.8 billion housing package in the June budget.
"This is all about giving first home buyers the power to choose an alternative to upfront stamp duty," Treasurer Matt Kean said on Saturday.
Instead of paying stamp duty, first home buyers can opt in to paying a $400 annual fee and 0.3 per cent of the land value while it's their primary residence.
The property won't be locked into the scheme if it's sold - existing homeowners would pay stamp duty to purchase while a first home buyer would face a similar choice.
"We want to remove one of the barriers to entering the property market and help first home buyers realise the great Australian dream of home ownership sooner," Mr Kean said.
The Labor opposition says the scheme won't end with first home buyers and wants the government to wait until after the March election before introducing anything.
Labor leader Chris Minns says the government has "absolutely no mandate" to introduce the scheme two months ahead of an election.
Opposition treasury spokesman Daniel Mookhey says the scheme is a recipe for a cost of living crisis and risks blowing a hole in the budget due to lost stamp duty revenue.
"We should be having a great debate about housing affordability in NSW. We should be having it at the election where people get to have a say," he said.
Labor will have more to say about the housing policies it will take to the election "shortly", Mr Mookhey said.
