Updated: Apr 23, 2020
In this modern age, it would not be an understatement to say that many people have their hands in your pockets. Paying property taxes once or twice a year directly to the city versus having your bank pay on your behalf can eliminate one of those hands and give you at least that much more control over your financial life. Regardless of how or why, one thing that is undeniable, is that these must be paid. Some home owners are required to pay property taxes through their lender based on some of the criteria involved in approving their mortgage; if you are not one of these people, consider the following as to why it may be beneficial to take care of this mandatory requirement on your own.
There are some advantages to paying the taxes through your lender such as convenience and no late fees or delinquencies. However, when submitting any mortgage application, generally the lender is using the previous year’s tax bill to determine how much should be collected with each mortgage payment to pay the bill in full at the end of the upcoming tax year. This means that from the get-go, assumptions are being made, and the correct amount may or may not be collected. The tax portion of your mortgage payments are kept in a separate escrow account. When the account is in surplus you earn interest equivalent to the average chequing account which is virtually non-existent, when the account is in deficit you are charged interest. The interest charged while in deficit is typically equal to your mortgage’s interest rate. We all know that mortgages are not generally paid off within a couple years, so over longer periods of time, incorrect estimations in your tax account can lead to significant amounts remaining in escrow or an unexpected bill from your lender at the start of the next tax year.
Statistics show that the average Canadian borrower stays with their current lender for an average of 3.5 years, what happens to the tax account when you switch to a new lender? The lender will pay out any balances as a part of your mortgage to the discharge costs of leaving them, which in turn leaves you having to replenish your tax account with the new lender. Over the average 25 or 30 year mortgage and several lender changes or refinances, this can be a vicious cycle of over payments and decreased cash flow. The limiting effects of decreased cash flow are obvious. With the rising cost of living, every dollar counts so why not look for an option where there is no possibility of error. Personally, I am a fan of a good old pre-authorized debit, it provides simplicity, and with online or banking apps its easier than ever to manage. A vast majority of municipalities offer a Tax Installment Payment Plan or TIPPS. These payment plans allow you to pay monthly, directly to the city, and they will of course calculate the correct amount ahead of time, all the time, every time.
Surely there are a google of ways to make use of any increase in cash flow but before you head over to Costco and buy an 864 pound jar of hazelnut spread, ponder this. What if you could save over the year with a low risk investment and pay the city off at the end of the tax year. Then the interest that you earn from the investment you carry over year over year and apply the concept of compounding. If you start and stick to this sort of a plan, depending on the performance of the investment, you could likely pay a full tax bill or two or even make an extra lump sum payment to the mortgage.
Again, YES, you have to pay your property taxes, at least now you are equipped with the knowledge to hopefully do it with more upside.