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.
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 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.
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:
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:
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.