One cost most often overlooked by homeowners is monthly property tax bills. Most often your lender will collect this through your mortgage payment and then pay the municipality on your behalf. Learn more about what property taxes cover and your options for making payments, so you can determine if paying them with your mortgage works best for you.

What Are Property Taxes?

Your local municipality collects property taxes from homeowners to cover the costs of essential services in your neighbourhood. These services can include things like garbage collection, park maintenance, funding for police and fire departments, snow removal and more. The amount of property tax you’ll pay as a homeowner is directly connected to the value of your property (as determined by the property assessment office) and the specific tax rate in your area. As your home’s value and the tax rate could change over time, you may find your payments changing year to year.

Options For Paying Property Taxes

When it comes to paying your property taxes you have two options: pay directly to the city or have your lender collect a portion each month as part of your monthly mortgage payment.

Paying directly to the city means that your taxes will likely not be paid on a monthly basis, and will instead be collected on a quarterly, semi-annual or annual basis, depending on your municipality’s structure. For this reason, be sure to get clarification on the payment plan in advance. If you have the extra cash flow to do this, it may be a better option as it allows you to set aside the money in advance in a TFSA or high-interest savings account so it can earn you back some interest, rewards points or whatever it is you prefer.

Including your property taxes in your monthly mortgage payment means you don’t have to worry about providing larger lump sum payments throughout the year, as you would when paying directly to the city. This option keeps things simple and doesn’t require you remembering to pay separately or having larger amounts of money on hand for those bills. This option also means you’ll never be late on a payment since it’s automatically withdrawn by your lender.

It’s important to keep in mind that once your mortgage is paid off, your lender will no longer be collecting payments from you, so it’ll be your responsibility to ensure your property taxes are paid beyond that point.

First-Time Home Buyer Considerations

If you’re a first-time home buyer, it’s likely that your lender will want to collect property taxes on your behalf since you’ve yet to establish your responsibility as a homeowner and the lender will take a hit if those taxes aren’t paid on time.

If you didn’t pay your property tax, the city could put a lien (legal claim) on your property. This would mean that if you file for bankruptcy at any point, the city is entitled to claim your unpaid property taxes. The reason why this is bad news for your lender is because if you do wind up filing for bankruptcy, the lien supersedes your mortgage debt so there’s a chance they may not get their full investment back. For this reason lenders will typically require first-time home buyers or “high-risk borrowers” to pay taxes directly through them to ensure they don’t run into any issues down the road should your financial situation change.

How Lenders Collect And Pay Property Taxes

In order to get your property taxes paid, your lender will estimate your annual property tax payment using the previous year’s taxes, your home’s most current value assessment and an extra percentage to account for any fluctuations or rate hikes that may occur throughout the year.

Once they have this number, they’ll divide it up by the number of mortgage payments you’re making for the year and add that amount into your payments each month. Each month when they collect the money for property taxes, your lender will hold it in an escrow account until the city says the property taxes are due. If there’s extra money left in the account after the property taxes are paid in full, your monthly payment in the following calendar year will be adjusted accordingly.

Whether you’re a first-time home buyer or a seasoned homeowner, it’s important that you’re prepared to manage different fees and financial requirements, including the payment of property taxes. Talk to your lender about your options in advance so you can have a better understanding of how their process works and what will be expected of you as a borrower. Looking for more insight into the home buying process? Have questions about financing a home? Our team of experts can help!