Hi both will transform your lives. I would go opt 1 as it gives 2 living spaces and I think the laundry is better off hall.
I asked my 17 yo daughter what she would like and she went opt 1 but changing the laundry so it is off the hall to bed 2 , even if this was her bedroom, and giving the walkway space from the laundry into bathroom for a bigger vanity. Laundry behind doors.

What climate and aspect do you have

Bit hard to comment on courtyard without knowing which way is north.
I do love natural light from all directions so the courtyard is great.
But having two kids myself, two living spaces is needed.

Sydney (humid / subtropical). North/West aspect.

Both are great but Option 2 for me, gives you a much better sized space for a family and any extra's The courtyard opening up to kitchen would be wonderful, study with a big window to throw light back into the passage way. Option 1 the family room is too tight, I have three kids.

I thought opt 1 has more storage

I assume you have checked as far as sizing goes ? I have no knowledge of Sydney rules , and it looks like it is attached to another property , but a 300 sq section is pretty small , and here in NZ older properties ( even inner city ) have to retain some ground space -- it's a bit tricky , depending on the actual zoning .

Don't want to put a dampener on things , but just checking .

Hi Pottsy, thanks and yes we are in the clear. The house is free standing but one side is built to the boundary.

The comments have been very helpful so far, please keep them coming :) Option 1 does tick a lot of the boxes for us and seems the more obvious one, however in Option 2 we see the space feeling much more generous throughout and might actually be more suitable...

I prefer Option 2. The rooms are bigger which compensates for no multi purpose extra living room. The children, can play in each other's rooms, and as they get older, as teenagers will be in their rooms with their friends. These days you do not need a TV to watch a movie with your friends. A laptop is sufficient. Who knows what technology will bring us in 10 years time, when your children will be teenagers.
Each room has good storage, and a home with a sense of space is much better than feeling enclosed.
My only concern is the laundry in the living room. Could this be somehow turned 90 degrees and made into a small alcove facing back of house.

Regarding children's room at the front of house. While the children are small they could use master bedroom and share. Master could be front room. When they get older they are given their own rooms and master becomes yours.
Think outside the box with use of rooms, while the children are small, and adapt as required.

As much as I like the idea of the courtyard, I am going for option one. The second living area is so much more useful. Courtyards look good and let in light, but how much are they actually used? They sometimes end up with dead plants and become a dumping ground for stuff that has no where else to go.

Referring to me me comment. If courtyard is not required. Make that your small multi purpose room, incorporating study desk.

If you were building in Melbourne I would build to max allowed on the block, this a Sydney house with a Sydney climate, what about cross ventilation, if down the track you want more internal space go up, enclose the courtyard or move. Where will the children play, a 4m deep yard isn't a lot of open space even when the kids are small. Option 2, has enough space to have a real kitchen with an Island plus a dining space and living . Option 1 has a table that you work on and when having.dinner you are eating in the kitchen surrounded by possible dirty dishes. The courtyard could double as a wonderful alfreco BBQ Dining

Thanks siriuskey. I should also add that the floorplan doesn’t show that there is additional yard area (approx double what you see in the plans attached).

is there a lane way to the rear of the cottage, and where is the extra land, You haven't added any dimensions which could be helpful

There is no laneway at rear. See full site area attached (home office / studio will be a future addition).

difficult to comment without dimensions ..can you share the plans of original house and proposed plans with dimensions

I'm coming late to this but I really love the one with the courtyard I think it's great and it will solve the problem all really long extended houses get where there is this sort of stale spot through the middle no one wants to be in. The middle section always lacks connection with nature and having an internal courtyard really solves that, especially if you invest in a large tree. There's always issues with light and air flow and this just works so much better. I think the placement of the study is really clever and the new and old are clearly distinct but connected. Better architecture usually means better living too.

My vote would be to retain the second living area much as the courtyard would be nice.

retain the second living area, better resale value as more rooms and you will find it more useful the longer you stay. until the children are in primary school they will want to be in the same living room as you so they will play out in the back living area but over time you will be happy to have a separate play room full of toys you dont have to look at constantly while in the kitchen. I would definetely put both children in 1 room for at least 5 years then you will have another room that could become a third adult sitting/reading area. courtyards let in light and could almost become the second living room, or could turn out to look neglected with dead plants and somewhere you have to sweep up all the time its windy?

retain the second living area, better resale value as more rooms and you will find it more useful the longer you stay. until the children are in primary school they will want to be in the same living room as you so they will play out in the back living area but over time you will be happy to have a separate play room full of toys you dont have to look at constantly while in the kitchen. I would definetely put both children in 1 room for at least 5 years then you will have another room that could become a third adult sitting/reading area. courtyards let in light and could almost become the second living room, or could turn out to look neglected with dead plants and somewhere you have to sweep up all the time its windy?

I prefer option 1 as having two living areas would be more useful and the children’s toys and noise can be in one place , except when playing outdoors . I don’t know if that is the best kitchen family layout as I am not good with that . I would be putting in a couple of Velux skylights in the first living / play room area .

or along the passage . I liked Kate’s daughter’s idea re the laundry as it utilises the space better . Just make sure that your internal doors are solid and not hollow .

I would only have a shower in the main ensuite as the family bathroom already has one .

Option 1 looks good to me. It looks like you are having a raked ceiling in the living areas? Depending on the pitch and height of this roof, you could consider a loft space over the Wet areas and part of hall. This might give you additional space for say a loft study, kids play space or more storage. Similar concept image attached. Wet areas and hallways can have slightly lower ceilings if need be.

I think option 1, if you are planning on staying there a while, as it provides that second living space, a better laundry, and possibly more storage options, which, in my opinion, you can never have enough of:) all the best in your decision!

Thanks for the feedback all! This has been really helpful. I think we've landed on Option 2 -- we love the courtyard and we think this will create a greater sense of light and space. While the second living room is appealing, we see ourselves spending most of our time in the same room and we've also decided to deck the courtyard to create more of a liveable space outdoors.

I'd love to get everyone's opinion on the living room / furniture layout. We're tossing up between 3 options and leaning towards 1 with a TV built into the joinery (or 3 with the TV on the North wall).

Option 1

Option 2

Option 3

Opt 3 for me. I think you will need the storage for kitchen on that wall, so best use of space is to have tv onto other wall.