Paying Property Taxes Through Your Mortgage — Is There Another Option?

If you own a home, you have to pay yearly property taxes to the municipality you live in. The money collected from this tax goes toward a variety of services, including public or catholic education, fire and police services, parks, roads, hospitals and libraries.

Property tax is usually calculated in Ontario as a combination of the general municipal tax rate, education tax rate, and property value. In British Columbia, property tax is calculated based on the funds needed for services, tax rates, and your property assessment.

Many people assume the only way to pay your property taxes is to roll them into your mortgage payments. But that’s not always the case.

How your down payment affects property tax payment options

Your down payment actually makes a difference in how you get to pay your property taxes. Some lenders require first-time homeowners who put down less than 20% to pay their property taxes through their mortgage. The thinking behind that is that you don’t have enough equity in your home for the lender to feel comfortable letting you pay the taxes yourself.

Another reason lenders may require this payment method is that first-time homeowners may forget when property taxes are due. That could result in the municipality putting a lien on their home, which would take priority over the mortgage debt. So, lenders are invested in ensuring that they get the money that they’ve lent back without any issues.

If you put down more than 20%, you may have the choice to pay property taxes as part of your mortgage or separately. Once your home is paid off, you’ll have to take on the task of paying property taxes yourself.

Paying your property taxes through your financial institution

Paying your property taxes through your mortgage means you don’t have to worry about keeping track of when your taxes are due. Your financial institution holds your money in a separate tax account (held in escrow) and pays the tax for you.

There are some disadvantages to this option, however.

Firstly, you may have to pay a bit more because some lenders may require a cushion of funds just in case property taxes increase. This is offset and used for future taxes, or is refunded when you request it. Secondly, you don’t have a choice in how you pay the taxes; the money is debited out of your account, so you can’t, for instance, use a credit card and collect points.

If there isn’t enough money in your tax account, the financial institution will still pay your taxes but you’ll get a notice from them to pay the balance due.

Paying your property taxes yourself

Depending on your down payment, you may also have the option to pay your property taxes yourself without making them part of your mortgage payments. There are several options for this, and each depends on your budget:

• Put the money in a separate account and pay your property tax in one lump sum at the beginning of the year. Done and done.
• Pay your property tax in monthly amounts. You’ll get a bill either online or in the mail outlining your yearly tax amount, broken down into monthly amounts. You can pay it online through your bank by setting up your municipality as a bill payee, by phone, by mail (via cheque) or in person (pre-pandemic). Most municipalities don’t allow for direct credit card payment because of the processing fees.
• Keep track of when your payments are due. Every municipality is different in terms of when they collect property tax payments. For instance, Mississauga’s 2021 property tax due dates were July 8, August 5, and September 2. Whereas Toronto issues two property tax bills a year, with the option for various instalment plans.

How to save and prepare for your property taxes

If you decide to pay your property tax yourself, it’s always a good idea to plan so you don’t have to pay interest on late payments.

In my decade of paying property taxes, I missed one payment during the pandemic because I had other things in my mind. I remembered when I got a late notice with penalty fees added. Not fun, so put your payment dates in your phone so you get a reminder.

Other things you can do apart from having a separate account include:

• Budget to put a specific amount from each paycheque into your property tax account.
• If you pay monthly, make sure to factor it into your budget.
• Set up automatic payments so you don’t have to think about taxes. Your municipality debits the money from your account.
• If you’re saving for next year’s taxes, budget for an increase. The best way to figure that out is to either look at previous years for your property (ask the previous owners) or check online with your municipality. There is no guarantee that your taxes will increase but it’s better to plan for higher payments and have the money than to scramble to make up the difference.

The reality is: you have to pay your property taxes. So if you have a choice of how to pay them, choose the easiest option to remember and the one that works best with your budget. You don’t want to get hit with an interest charge or a lien. That’s a sure way to take the shine out of being a new homeowner.