Should You Pay Property Taxes with Your Mortgage?
Whether you should pay your property taxes with your mortgage so that your lender pays the municipality on your behalf or if you make property tax payments straight to your city is an age-old debate. While first-time home buyers are often required to pay property taxes as part of their mortgage payments, many people continue to pay them this way throughout their years as mortgage holders. It comes down to which way you feel more comfortable ensuring your property taxes are paid on time.
- Property taxes are charged by your municipality and used to generate money for local services such as garbage, road maintenance, snow removal, parks and recreational facilities, libraries, transportation, etc.
- Property taxes are based on a number of factors including your municipality’s budget, the assessed value of your property and its relative value compared to other properties in your area.
- First-time home buyers are often required to pay property taxes with their mortgage payments to ensure they stay up to date.
What are property taxes?
Property taxes are charged by your municipality and used to generate money for public purposes in your area. They directly fund municipally-run services such as garbage, composting and recycling, road maintenance, snow removal, parks and recreational facilities, libraries, police and fire, transportation and more.
Your property taxes are based on a number of factors including your municipality’s budget, the assessed value of your property and its relative value compared to other properties in your area.
Your property tax bill is mailed near the beginning of each year and the required amount often increases annually.
To simplify the calculations, consider that a small municipality is comprised of three properties worth $125,000, $175,000 and $200,000, and services totalling $2,000 must be paid by property owners through property taxes.
Each property owner in the municipality pays a proportion of that $2,000 based on their property’s assessed value. This is calculated by first tallying the value of all three properties, for a total of $500,000. Since the cost of services is $2,000, the tax rate is $2,000/500,000 = 0.004 or 0.4%. Therefore:
- The owner of the $125,000 property pays $500
- The owner of the $175,000 property pays $700
- The owner of the $200,000 property pays $800
- The total of the property tax paid by the three property owners is $2,000
Ways to pay your property taxes
There are two ways to pay your property taxes:
1) Pay directly to the municipality. This is often a choice given to homeowners who have already owned properties in the past and are, therefore, aware of the need to pay property taxes. Typically, you have the option of paying on a monthly, quarterly, semi-annually or annual basis. Payment frequency may also be determined by the municipality. You can usually pay your taxes online, in person at your financial institution, or via mail, telephone banking or preauthorized bill payment.
2) Pay with your mortgage payment. In this case, your lender collects property tax payments from you as part of your regular mortgage payments and then pays your property taxes to the municipality on your behalf.
Important: If you live outside of a municipality, the responsibility of the local services fall under the purview of the provincial government and you’ll be required to pay what’s known as a provincial land tax
First-time home buyer considerations
Your lender will often require you to pay property taxes through your mortgage if you’re a first-time home buyer – particularly if you make less than a 20% down payment – as assurance that your property taxes will be paid regularly and on time.
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How lenders collect and pay property taxes
When lenders are paying your property taxes to the municipality on your behalf, they simply take your annual property taxes and divide the total amount by the number of mortgage payments you make each year. This can be a helpful option – particularly for first-time home buyers – since your lender then takes on the responsibility of paying your property taxes to the municipality. This becomes one less ongoing cost you have to worry about paying yourself.
Important: Property taxes are generally comprised of two components – municipality tax and education tax
Frequently Asked Questions
Should I pay property taxes with my mortgage?
There are both pros and cons to paying your property taxes with your mortgage. The biggest benefit is that you no longer have to worry about making your property taxes on time. You also don’t have to budget separately to ensure you have this extra money set aside when it’s already included in the mortgage payments collected by your lender.
The downside is that you won’t be generating interest on your property tax payments because your lender typically collects the money upfront so that it’s available for payment to your municipality. Your lender will also often estimate the cost of your annual taxes and add a buffer to ensure you pay enough, which means you’re often overpaying. And, although the money will be reconciled, you’ve still often paid too much upfront – money that could be earning interest in your savings account.
How does my down payment affect property tax payments?
Once you have at least 20% equity in your home, you can request to pay your property taxes on your own. So, if your down payment is at least 20% and you’re a first-time home buyer, you may be able to pay your taxes on your own if you so choose.
Are property taxes included in my mortgage in Canada?
In most cases, property taxes are included in your mortgage payment and your lender pays them to the municipality on your behalf. This is often a default measure used to ensure you stay up to date on your property taxes. But if you’ve owned property in the past, you may want to request to pay your own property taxes.
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