In most cases, you are able to make property tax payments on your own. Otherwise, your mortgage lender may prefer servicing, collecting, and paying the municipality on your behalf.
The tax payments and/or holdback is held in an escrow account and disbursed to the municipality accordingly. Typically there is a section on your mortgage statement which shows the property tax balance. You will be credited with any unused tax portion when you discharge the mortgage.
The tax municipality will multiply their ‘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 Taxes: $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, your total monthly payment = $1,480.54 ($1,250 + $230.54).
Your lender may wish to gross-up the tax levy by 10%. (Property taxes tend to increase yearly). $2,766.47 + 10% = $3,043.12. In which case your total monthly payment = $1503.60.
Your $1,250 monthly mortgage payment has become a $1503.60 total monthly payment. However, don’t lose sight of the fact you’d have to pay the property tax bill whether directly or indirectly.
Your lender may also wish to deduct and holdback the equivalent of 3-6 months of property tax payments from the loan proceeds. This is to act as a reserve in the event of default or upcoming installments or increases. $3,043.12 / 12 x 3 = $760.53. Even then, there are times when a holdback is insufficient and you as the homeowner may have to pay the difference owing from your own resources on upcoming installment dates.
Why does my lender care?
In addition to it being a covenant of a homeowner to pay property taxes, lenders want to ensure that the property tax account remains in good standing for as long as they have an interest in the property.
In the event of property tax default, a lender may opt to pay the outstanding taxes balance from their own funds, add them to the outstanding mortgage balance, and note the loan in default.
A lender will act prudently in this matter to protect their position – the municipality might eventually register a lien against the property which would take precedence to any other registration on title, ultimately affecting the lender’s security and equity position.
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.
At this point, the property owner has 1 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:
Keep an appropriate amount of money in your bank account for your total mortgage payment (mortgage + property taxes). If there are insufficient funds in your account to satisfy the property tax portion, the total mortgage payment will bounce.
Whether your lender insists on collecting property taxes on your behalf, or if you wish to assume this duty, you must remember to budget for upcoming installments. It might make sense for you to keep this amount of money tucked away in a high-interest savings account.
Remember to set calendar reminders for upcoming installment dates.
You may just simply prefer wrapping the property tax payment into the total mortgage payment for simplicity.
PS: If you wish to challenge MPAC’s assessed-value please click here.
PPS: If you are struggling with property tax arrears, get in touch with us to discuss your options.
-DV Capital Corporation #13186