By Julie Jaggernath
Homeowners are required to pay their property taxes each year. For many cities and towns across Canada the annual bills for 2016 were due on July 4th, an extension of two days because the normal due date of July 2nd fell on a weekend. Additionally, some municipalities have separate utility bills that are due each year, either with the property tax bill or twice at other times of the year.
A lot of property owners in areas where property values have increased substantially were faced with bigger than expected bills. Having your property’s equity appreciate is great, but if you’re not selling, you’re paying the higher taxes based on your property’s higher assessed value.
While we can't help you cut your taxes in half, we can help you cut your payments down to size so that they're more manageable.
Here are 3 options and some additional tips to make planning for next year’s property tax bill easier:
1. Make Payments with Your Mortgage
Many financial institutions allow you to include your property taxes with your mortgage payment. The bank then holds that money in a separate tax account and when your payment is due, they remit it on your behalf. The benefit to this method is that it’s automatic and usually counts as part of your mortgage payment, so no separate money is deducted from your bank account. If there isn’t enough money set aside in your tax account, they will still pay the bill…keep reading to find out more about this.
2. Set Money Aside in a Separate Savings Account, DIY
If you’re disciplined, you can DIY (do-it-yourself). Open a separate savings account for your property taxes and add money to the account every time you receive your pay cheque. The best way to do this is to set up an automatic transfer so that you don’t forget to do it. Not paying your property taxes in full and on time can leave you in an expensive and/or difficult situation.
Determine the amount to set aside each payday by taking your current property tax bill, adding approximately 2.5% (for a potential increase next year), and then dividing that amount by the number of paydays you have between now and when the bill is due. Some savings accounts may even earn you a bit of interest.
3. Set up Pre-Authorized Payments with Your City or Town
Another option to make incremental payments, rather than face one big bill, is to set up pre-authorized payments with your city or town. This means that you set up payments to your property tax bill in much the same way as you would a utility bill. However, instead of a pre-authorized payment to a utility company, you make a pre-authorized payment to your municipality. With this method of payment you allow your municipality to debit your account on a set day each month. They hold the money and pay it to your property tax bill on the due date. Information about exactly how this works, and if your city or town offers the service, is available through your municipality’s website.
What Happens When There’s a Shortage in Your Tax Account at Your Financial Institution?
If you are paying your property taxes with your mortgage and your financial institution is remitting the payment on your behalf, there’s always the chance that your tax bill will be higher than what you have accumulated in your tax account. When this happens, your financial institution will pay the full tax bill and then send you a notice to deal with the shortfall.
This notice will usually arrive in late July or August and it typically gives you two options:
- To pay the shortfall amount all at once – this is the best option if you can afford it.
- To spread the shortfall amount out over the next year, adding it to the tax component of each of your mortgage payments. Some institutions charge interest and/or fees to do this.
Along with these options will be the recommendation that the tax component of your mortgage increase a bit to compensate for a higher payment next year. The letter will give you the adjusted payment amount and the due date on which it will take effect.
What Happens if You Have Money Left Over in Your Tax Account at Your Financial Institution?
There is a chance that your tax account at your financial institution could have money left over in it after your property tax bill is paid. This may happen for a few reasons, e.g. your municipality charged property owners less property taxes than anticipated, or you increased your tax component payment to avoid having a shortfall.
Regardless of the reason, when there is an overage your financial institution may lower the tax component and decrease your overall mortgage payments going forward. The thought of having your mortgage payment go down might be attractive, until you realize that it’s likely only by a few dollars at most.
What to Do Instead of Lowering Your Mortgage Payment
If you can afford your current mortgage payment, contact your financial institution and ask them to keep your payment the same. Instead of lowering it, use the money that they were going to deduct and add it to what you’re paying towards the principal. Most mortgages do allow for an increase in the payments towards the principal and your financial institution will tell you if your type of mortgage does have this pre-payment privilege.
If for some reason you’re not able to add the money to your principal payments, or if you anticipate that your municipality will increase property tax rates for next year, consider keeping your payments the same anyways. This will protect you from having a surprise bill next year.
Find Out from Your City or Town What to Do If You Can’t Pay or If You’re Paying Late
Each city or town in Canada will have a slightly different way of managing property taxes, so to find out the exact details about how your property taxes can be dealt with, check your municipality’s website. There you’ll find payment options, what will happen if you can’t pay, how the money is used, how to claim any homeowner grants you might be entitled to, and late payment penalties.
Paying Property Taxes is Essential If You’re a Home Owner – Find the Least Painful Way to Do It
As homeowners, paying our property taxes in full and on time is essential; and one could argue, so is finding the least painful way to do it. Some people choose not to pay their taxes in small increments, either at their financial institution or through their municipality because they want to earn interest in their tax account. While some institutions may pay a bit of interest, many don’t. This is in lieu of charging a fee for the service. If you are disciplined enough to save the money for your property tax bill on your own, that is the way to go. However, good intentions aren’t enough. If when the bill comes you pay it using your line of credit, you will likely pay more interest than if you had made small payments along with your mortgage all year.