Property Tax and Mortgage Fusion: Smart Strategy or Potential Pitfall?

Property taxes are fees charged by local governments on property owners. These taxes are based on the assessed value of the property. They fund public services and infrastructure within the community. They’re fixed expenses that homeowners need to factor into their budgeting and financial planning.

What might be the anticipated cost of your property taxes?

Understanding the cost of your property taxes relies on three key factors: your property’s assessed value, area or province, and property type(residential, multi-residential, commercial, etc.). For instance, if you have a $500,000 residential property in Toronto with a tax rate of 0.666274%, your annual property taxes would amount to $3,331.37.

Here’s a breakdown of ways to pay property taxes in Canada:

1. Direct Payment to the Municipality: Pay property taxes directly to your city, ensuring factoring it into your budget. Although not due monthly, including them in your financial planning avoids unexpected cash shortages when the time for payment arrives.
2. Merging with mortgage payment: This option ensures your lender collects a portion of property taxes alongside your monthly mortgage. This consolidated payment simplifies your financial management.

NOTE: The provincial government takes charge of local services if your home is outside a city or town. In this case, you’ll need to pay a provincial land tax.

How does your lender handle the payment of your property taxes?

Paying property tax through your lender is a simple process. Your lender calculates an estimate based on previous taxes, recent assessments, and an added percentage for potential fluctuations. The funds are held in an escrow account until tax payment deadlines. Adjustments occur in the following year’s monthly payments if there are surplus funds after paying property taxes. This method ensures seamless tax payments without homeowners needing to manage these funds actively.

Pros and Cons of combining your property taxes into your mortgage payments

Balancing convenience with potential costs is crucial when deciding whether to merge property taxes with your mortgage or not. Consider these pros and cons before adopting this approach.

Pros:

• Convenience: Bundling property taxes streamlines your financial responsibilities. Rather than managing separate payments, merging taxes with your mortgage creates a single, consolidated payment. This simplifies your financial routine, making keeping track of obligations easier.
• Budgeting Ease: Predictable monthly payments offer a structured approach to financial planning. Knowing how much to allocate monthly for mortgage and property taxes gives you greater control over your budget. This predictability allows for better financial management and helps prevent unexpected financial strains.
• Timely Payments: Lenders ensure timely payments when property taxes are integrated into your mortgage. This relieves homeowners from the responsibility of manually handling tax payments and minimizes the risk of late payments, which could otherwise incur penalties or late fees.

Cons:

• Possible Higher Costs: Lenders may include some extra amount to account for additional payments that might arise due to unexpected changes in taxation regulations.
• Missing the rewards and interest on your funds: Your lender keeps your property tax funds in escrow until the due date, earning no interest. Meanwhile, a savings account would earn you interest, which means you’re missing out on potential extra earnings. Certain cities accept tax payments via credit card, offering rewards like points or cash back. By having your lender handle payments, you’re losing these potential rewards.

Property Tax Essentials for First-Time Homebuyers

First-time homebuyers, especially with less than a 20% down payment, often see lenders bundling property taxes into their mortgages. A consistent, on-time tax payment schedule assures lenders of your commitment to meeting these obligations promptly.

The decision to fuse property tax payments with your mortgage demands careful consideration. While it offers the convenience of a streamlined financial approach, it also presents potential pitfalls. Homeowners must weigh the benefits against the drawbacks, factoring in possible increased costs and loss of control over the payment process. Remember, understanding the distinctions empowers you to take charge of your property ownership journey confidently.