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11 Aug

Property Taxes – Mortgagor Paid vs Lender Paid

General

Posted by: Chanele Langevin

When accepting a mortgage agreement, it is important to understand some of the fine print regarding who will be responsible for paying property taxes. Depending on your situation and preferences, this little detail may be one of the deciding factors for which lender you choose when you have multiple options on the table.

Mortgagor Responsible

There are 2 ways for a mortgagor to pay their property taxes:

  1. A lump sum payment may be paid annually to the City/Municipality.  This is a good option if a mortgagor prefers to pay with a credit card to gain loyalty points/miles.  It also may give the opportunity to have a large sum of money in a savings account collecting interest.
  2. The other option is called TIPPS (Tax Instalment Payment Plan).  With this option the mortgagor will set up a monthly payment to be taken directly from their bank account by the City/Municipality.  There are no extra fees or interest payments when using the TIPPS program.  The annual property tax payment is equally divided in 12 monthly instalments per year.  This is a great option for mortgagors who prefer to operate on a monthly budget and know what their payments are month to month.

Lender Responsible

Another option that comes into play for is when certain lenders do not allow the mortgagor to have the responsibility of paying their own property taxes. This happens with some lenders when a home buyer has a down payment of 20% or less. These lenders do not like to take a chance of property taxes not being paid and having a lien put on a property they hold interest in.

There are no extra fees to the mortgagor when the lender pays the property taxes on their behalf. They do, however, add a “cushion” onto the mortgage broker payment on top of the monthly payment. They do this because they are estimating the amount based on the previous tax year and the most recent tax assessment. The property tax money is put into an escrow account and the payment to the City/Municipality is paid on the mortgagor’s behalf.  If there is money left over in the account it is put towards the following year’s taxes. There may also be the issue of the lender underestimating the fees, creating a shortage in the escrow account. This means the mortgagor will have to come up with the extra funds to pay the exact amount owing to the City/Municipality.

Having a lender making the property tax payment can be a relief to some homeowners.  It is one less payment that the Mortgagor has to remember to make on their own and they can have confidence that their property tax bill will always be paid.

Whether a mortgagor pays their own taxes or the lender pays the property taxes on the mortgagor’s behalf, the best option comes down to what the mortgagor is comfortable with and whether they have a lender with specific requirements.