Should You Pay Property Taxes Through Your Mortgage?

Owning a home comes with many more expenses than just your mortgage. Among other things, you’ll need to pay property taxes to your municipality. But just how much do you have to pay, and should you opt to have these payments included on your mortgage payments?

Property Taxes In Canada

Property taxes are fees that the local municipality collects from homeowners to cover the cost of essential services in your neighbourhood, including police and fire departments, garbage collection, snow plowing, and tending to parks, to name a few. 

The property taxes you pay on your home are based on a percentage of your home’s assessed value and the specific tax rate in your area. They are calculated by multiplying the assessed value of your home as determined by the property assessment office in your city by the local tax rate.  

You may find that your property taxes fluctuate from one year to the next due to a change in your property value and the local tax rate. 

Ways To Pay Your Property Taxes

You have two options when it comes to paying your property taxes: either pay them directly to the city or include them with your mortgage payments. 

If you choose to pay your property taxes directly to the municipality, you could be paying them quarterly, semi-annually, or annually. Make sure to set aside enough liquid funds to be able to pay these installments when they are due. 

If you pay through your mortgage, the property tax payments will be included in your mortgage payments, and your lender will send your property tax payments to the city on your behalf. 

If you’re a senior, you can defer your property taxes and save money. 

What Does It Mean To Pay Your Property Taxes Through Your Mortgage?

To pay your property taxes through your mortgage, your lender will estimate your yearly property tax payments based on your property taxes from the previous year, your home’s recent assessment, and a certain percentage to cover fluctuations in property assessment and tax increases. 

To illustrate, let’s say your annual property taxes are estimated at $3,000 and you pay your mortgage in monthly installments. That means you’d have to pay $250 per month ($3,000 ÷ 12). That extra $250 will be collected on top of your regular monthly mortgage amount. 

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Pros And Cons Of Rolling Your Property Taxes With Your Mortgage 

There are perks and drawbacks to paying your property taxes through your mortgage that you should consider before choosing which route to take. 

Pros

• No lump sum payments to make. By including a portion of your property tax payment in your mortgage, you won’t have to set aside large chunks of money every so often to hand over to the city. Instead, your payments will be hidden within your mortgage payments, and you may not even notice that you’re paying them. 

• No late payments. You’re responsible for making your property tax payments on time when they come due. By having them included in your mortgage payments, you won’t have to worry about forgetting to pay your installments and can therefore avoid any interest that comes with late payments. 

• Easier to budget. There’s some budgeting required when you have an extra bill to pay every so often in the form of property taxes. But when they’re included in your mortgage, your budget is automated for you.

Cons

• Your lender could overestimate your property tax amounts. There’s always a chance that your lender may miscalculate your property tax payments, leaving you paying more than you need to. 

• You can’t invest the money included in the mortgage. The amount you have to pay in property taxes can add up to be thousands of dollars every year. Rather than having that money taken every month as part of your mortgage payments, you could be missing out on opportunities for short-term investing to make that money work for you. Instead, that money is always tied up, leaving you with little control over it. 

• You could miss out on interest. The money collected by your lender will be held in escrow until the property tax payments are due. In the meantime, that money is earning some interest, but the rates typically are not as high as they would be in a high-interest savings account. As such, you could be missing out on higher interest payouts. 

Can You Choose To Pay Your Property Taxes Yourself? 

If you’re a first-time homebuyer or have very little equity in your home, your lender may require that you pay your property taxes through your mortgage. That’s because if you fail to pay your property taxes on your own, your lender may be at risk. In this case, your lender will collect your property taxes along with your monthly mortgage payments and pay the city on your behalf. 

Failing to pay your property taxes could result in a lien being placed on the title of your home. A lien is a legal claim against your home. If you were to ever file for bankruptcy, the city could claim your unpaid taxes against your property. This isn’t a good scenario for your lender because the lien would have to be paid off before your mortgage debt. 

In this case, the lender may not be able to get their entire investment back. For this reason, they may require that riskier borrowers include their property taxes in their mortgage payments. 

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Final Thoughts

Property taxes cannot be avoided when you own real estate. But you may have some control over how you pay them. Weigh the pros and cons of paying your property taxes directly to the city versus allowing your lender to pay them on your behalf before choosing which route to take.