It is that time of year again when many of you will be receiving your property tax bill in the mail and are not quite sure what to do next.
Well, fear not my friends, that’s what your trusted mortgage professional is for. To clarify those murky property tax waters.
You have a few options of how to pay your taxes though not all lenders will allow all the options. The reason for this is that taxes owing to a governmental agency trump the mortgage.
So if, for instance, you fell way behind on your property taxes, the City has the ability to put a charge against the title of the property which has to be paid out before any mortgage. This leaves the lender at risk as they may not be able to collect all of the funds you owe them.
Option A – you can opt to pay annually. Ideally you have a separate savings account where you will faithfully put away 1/12 of the property taxes owing each month so that when you receive your tax bill in the mail come June you can pop right down to City Hall and pay those nice folks in full.
Option B – you can chose to participate in the TIPP or Tax Instalment Payment Program. This allows the municipality to collect from you 1/12 of the annual amount owing directly from your bank account on the last business day of the month. There is no charge to enroll in this program and it is very easy to do so. You will still get the annual Property Tax Bill but there will be a big bold DO NOT PAY written across the bottom.
Option C – you can opt to have the property taxes collected with your mortgage. Many people like this option as it is one less bill they have to pay but there is something of which you should be aware, there can be an adjustment based on when the lender started collecting your taxes which can leave you in a shortfall position come tax time. I say forewarned is best so let’s take a minute and figure this out. The process is simple. They collect a regular amount from you with your mortgage payment, and the money is set aside in Property Tax Savings Account.
When you receive your first tax bill, you may have to forward it to the lender and then usually the lender and the municipality talk directly to each other after that.
Funds accumulate in your Property Tax Savings Account and are used to pay your annual property taxes. They ensure the bill is paid for your property regardless of the balance in your account.
This means that at some point during the year your account may have a surplus and at others times a shortfall.
A surplus is money accumulated in your Property Tax Savings Account. As in a chequing/savings account at your bank, a surplus in your account will be credited with interest.
A shortfall in your account happens if there was not enough money in the account when property taxes were paid.
This money needs to be reimbursed to the lender for taxes paid on your behalf. If there is a shortfall in your account, you are charged an interest rate equivalent to your mortgage rate.
They take the outstanding amount into account when calculating your new tax portion for the upcoming tax year. You may reduce the shortfall in your account by making a lump sum payment into the account, or a series of payments over time.
If the new tax portion is not manageable, you can extend the repayment of the shortfall over more than one year.
After they pay final taxes each year, they will review your tax portion to ensure we are collecting the necessary amount.
They will send you a Property Tax Statement to show the status of your Property Tax Savings Account, and to advise of any change to the tax portion.
This will show how they calculated the tax portion, and will tell you when the change will take effect. The tax adjustment also takes into consideration a possible increase in taxes.
Ok there you have it in a nutshell, property taxes 101. Have a great week.
Pam Pikkert is a mortgage broker with Dominion Lending Centres – Regional Mortgage Group in Red Deer.