Property Taxes and Your Mortgage Payment.
Property Taxes and Your Mortgage Payment
In most cases, you are able to make your property tax instalments directly to your municipal tax department. Otherwise, your mortgage lender might opt to service, collect, and pay property taxes on your behalf. Furthermore, the same requirements may reply to the collection and payment of condominium and strata fees.
In the event that your mortgage lender wishes to collect property taxes on your behalf, note that funds are held in a tax escrow account. The holdback amount and also the tax payments, are then disbursed to the municipality on the appropriate instalment dates. Your mortgage lender might ask you for a property tax holdback, which also stays in escrow or trust, and is used to pay any property tax arrears or upcoming instalments. Keep in mind however that the holdback will eventually run out and your mortgage lender might contact you to pledge an additional sum. Typically there is a section on your mortgage statement which shows the property tax balance to provide you with reference. When you sell your property or refinance your mortgage you will be credited back any amount that was held in escrow or trust.
Although you are likely aware, we will just want to remind you how your property tax levy is calculated. Your municipality will multiply their respective ‘tax rate’ by the MPAC (The Municipal Property Assessment Corporation) ‘assessment value’ of your property.
MPAC Assessment Value: $450,000
Tax Rate: 0.61477%
Annual Property Tax Levy: $2,766.47
- With a monthly mortgage payment frequency, there will be a monthly property tax component of $230.54 ($2766.47 / 12).
- If your monthly mortgage payment is $1,250.00, your total monthly payment will be $1,480.54 ($1,250.00 + $230.54).
- There are times where your mortgage lender might want to gross-up the annual tax levy by 10% to account for future increases. This means that your $2,766.47 tax levy when grossed-up 10% equates to $3,043.12, which in turn increases your total monthly payment to $1503.60.
Why Is My Mortgage Lender Involved?
It is a borrowing covenant of yours to pay your property taxes, and your lender wants to ensure it happens. Your mortgage lender registers their mortgage against your property and therefore has an interest in the lands. It is much to their interest that property taxes are paid and up to date for as long as they have interest in the property.
In the event of property tax default, a lender being aware, may opt to pay the outstanding taxes balance from their own funds. They would then simply add this sum to the outstanding mortgage balance, and elect whether or not to note the loan in default.
Your mortgage lender will act prudently in this matter to protect their position. Unpaid property tax arrears will eventually trigger the municipality to register a lien against the property which would take precedence to any other registration on title. This also includes taking priority to a mortgage. Depending on the amount of your mortgage lenders advance, a significant amount of property tax will affect your lenders equity position. In extreme theory, your mortgage lender might lose funds from the sale of your property if there is insufficient equity. Pursuant to the Ontario Municipal Act, 2001, a City can register a Tax Lien against a property if property tax payments have not been paid for 2 years. In most cases, the property owner has one year from the date the Tax Lien was registered to establish a payment plan. Failing which, continued default will lead to a forced sale of the property which is facilitated by the municipality.
Food for Thought
It is important for you to remember to budget for upcoming property tax instalments whether you are or your mortgage lender pays your municipality. If your mortgage lender collects your property taxes and you have an insufficient amount in your bank account for the property tax portion, your mortgage payment will bounce. We recommend keeping a small cushion tucked away in a high-interest savings account. Another idea is to set calendar reminders for upcoming instalment dates. After reading this, you might just prefer wrapping up the property tax portion into your total mortgage payment for simplicity.
If you wish to challenge MPAC’s assessment-value for your property please click here.
If you are unfortunately struggling with property tax arrears contact us to discuss potential solutions.