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Lender Paying Property Taxes

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[OP]
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Dec 27, 2013
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Lender Paying Property Taxes

Hey everyone. I have a quick question about the mechanics of a lender collecting and paying property taxes on my behalf. I'm going to call the lender this evening, but I figured I'd make this post to have some background knowledge.

1. I understand that the lender will take 1/12th of the estimated property taxes each month on top of my monthly mortgage payment and put this in an account from which they will pay property taxes. Our home just closed last week, and the first property tax installments will be due before the account has a large enough balance. I've read that lenders will still pay the taxes, but we'll be paying interest at the same rate as our mortgage on that overdraft amount. Is there a way that I can make a lump sum payment to this tax account to avoid this interest, or pay the city myself directly?

2. Do I need to do anything in terms of forwarding the tax bill from the city to my lender, or will the lender find out the installment due dates and amounts on their own?

3. I understand that this is a requirement for hi-ratio mortgages, and that at such time that my equity in the home reaches 20%, I can choose to cancel this arrangement and pay the property taxes on my own. For this 20% figure, is it based on the purchase price of the home and total size of mortgage (e.g. let's say $500,000 purchase price, $50,000 down = 10%. Once another $50,000 of principal is paid, equity is now considered to be 20%) or is it based on appraised value of the home (e.g. home is appraised at $562,500, mortgage was for $450,000, $450,000 is 80% of %562,500, equity is now considered to be 20%). If the latter, does the bank need to do the appraisal, or could I do it?

Anything else I need to know/worry about in terms of having the lender collect and pay property taxes on my behalf?

Thanks!
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May 17, 2012
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Montreal
I'm in Montreal with First National as my lender so this is based on my experience with them for my property only :

1) When I bought my place in 2011 I was in a similar situation (bought in May, 2nd payment for taxes was due a month later or so). I actually HAD to pay the city directly for the first year (May to Dec 2011 portion of the taxes that is), while my lender started collecting money from me right away for the 2011 school taxes that were due in August and the 2012 city taxes due March of next year. I don't remember having any other options so I'd ask if this is a possibility (i.e. can you pay the current year taxes yourself and your lender will cover 2016 onwards) although that means more money out of your pocket up front obviously. I don't believe they would charge you interest if they have to cover for more than what they have collected from you so far, they would likely adjust the next year how much money they take every month to compensate but that might be me being naive here ...

2) No, the city will send a copy to your lender directly. It will say on your tax statement that a copy has been sent to your lender.

3) I would lean towards purchase price, not appraised value but can't confirm this.
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Nov 11, 2004
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Do they charge interest or a fee for this service?
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In most cases there is little reason to ever have your lender pay your property taxes for you, unless you are horrible at paying bills.

The lender will often estimate the property taxes way high or low, resulting in too much or too little paid. Both ways are not ideal.

Why not just wait until you get the actual tax bill from the city, then just pay the actual amount due at the time it's actually due? Most municipalities let you go on pre-authorized payments also spread over the year, so you'll never miss a payment. Unless the lender if forcing you to pay taxes through them as a condition of your mortgage, I see little reason to do this.
[OP]
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Dec 27, 2013
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rob444 wrote: In most cases there is little reason to ever have your lender pay your property taxes for you, unless you are horrible at paying bills.

The lender will often estimate the property taxes way high or low, resulting in too much or too little paid. Both ways are not ideal.

Why not just wait until you get the actual tax bill from the city, then just pay the actual amount due at the time it's actually due? Most municipalities let you go on pre-authorized payments also spread over the year, so you'll never miss a payment. Unless the lender if forcing you to pay taxes through them as a condition of your mortgage, I see little reason to do this.
If an owner is in arrears with property taxes, city beats lender when it comes to getting their money back. Lenders protect themselves by directly billing those with hi-ratio mortgages for property taxes. I don't have a choice.

I want to avoid paying interest on payments that I am able to make now. The lender won't have enough in the tax account by the time the first installment is due. Thats where my first question came from. I also agree I'd rather pay my own bills rather than have someone else pay them. That's where my 3rd question came from; I want to stop this process as soon as possible.
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Nov 11, 2004
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Ottawa
Do you pay a fee, or are charged interest on this?
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[OP]
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Dec 27, 2013
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ilusa wrote: Do you pay a fee, or are charged interest on this?
For me it's a requirement, so no. I know that people with a conventional mortgage can request this. I'd imagine the funds represent an interest free loan to the lender, so they wouldn't charge an additional fee.

In terms of interest, I read one article stating that if the tax account does not have enough funds to cover a payment, it will be treated the same as overdraft on a chequing account and the amount will be charged whatever interest rate the mortgage is at. I'm not certain if I'd receive any interest at all for the time the funds are sitting there waiting for the tax bill.
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Aug 12, 2006
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jvnanu wrote: If an owner is in arrears with property taxes, city beats lender when it comes to getting their money back. Lenders protect themselves by directly billing those with hi-ratio mortgages for property taxes. I don't have a choice.

I want to avoid paying interest on payments that I am able to make now. The lender won't have enough in the tax account by the time the first installment is due. Thats where my first question came from. I also agree I'd rather pay my own bills rather than have someone else pay them. That's where my 3rd question came from; I want to stop this process as soon as possible.
The answer to your third question is going to depend entirely on your lender. I also have a high-ratio mortgage (bought in 2012 with 5% down) and my lender (PC Financial) doesn't pay my property taxes on my behalf, I pay them directly to the city myself. It's not part of their requirements to pay the taxes through them - unless their policy has changed in the last 2.5 years.

So you'll have to speak to whoever your mortgage is with and find out their specific requirements.
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jvnanu wrote: If an owner is in arrears with property taxes, city beats lender when it comes to getting their money back. Lenders protect themselves by directly billing those with hi-ratio mortgages for property taxes. I don't have a choice.

I want to avoid paying interest on payments that I am able to make now. The lender won't have enough in the tax account by the time the first installment is due. Thats where my first question came from. I also agree I'd rather pay my own bills rather than have someone else pay them. That's where my 3rd question came from; I want to stop this process as soon as possible.
What I do with the City of Toronto, is set them up as a bill-payee and simply pay the amounts directly from my bank account online. Or you can simply go to your government office, and they should have a teller that can accept payments in person.

As long as you have a copy of your tax bill from the city, and know how much you've been paying to your lender, you should be able to figure out the exact amount you can pay directly to the city to ensure the amount you've paid as of the due date is correct.
[OP]
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Dec 27, 2013
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rob444 wrote: What I do with the City of Toronto, is set them up as a bill-payee and simply pay the amounts directly from my bank account online. Or you can simply go to your government office, and they should have a teller that can accept payments in person.

As long as you have a copy of your tax bill from the city, and know how much you've been paying to your lender, you should be able to figure out the exact amount you can pay directly to the city to ensure the amount you've paid as of the due date is correct.
I appreciate the advice but I think you're misunderstanding. My mortgage agreement with my lender (MCAP... well, whoever MCAP manages it for I forget the exact name) is such that they will take out 1/12 of my total property taxes out of my account together with my monthly mortgage payments. These extra withdrawals will go into an account from which they will pay the city. I can not opt out of this. If I were to pay the city myself, the lender would still take that money out and leave it in the account. In that case, the city would obviously not send a bill to the lender, so a bunch of money would be siting in an account for 5 years until the mortgage term ends and they throw any extra amount to the remaining balance. I'd be giving my lender a $3000 annual interest free loan. Based on this, I do not have the option to pay the city myself. I must make payments through my lender.

My questions specifically are:

The first payments will be due before the lender has taken enough to cover them. Will I be charged interest on the "overdraft" amount that the lender needs to use to cover the taxes, and can I avoid this by making a lump sum payment, either to the lender, or to the city, to cover this difference?

When does the lender consider me to have the 20% equity required to opt out of this arrangement? Is it when my payments reduce the principal remaining to 80% of the purchase price, or to 80% of the appraised value? If the latter, what is the process that I need to go through to have the home appraised, and demonstrate to the lender that I've reached that 20% equity benchmark.
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Dec 8, 2008
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Montreal, QC
My lender (TD) forces me to pay property taxes into a special account they manage and they pay out from the balance, they sometimes run a negative. They don't charge interest however. I'm CMHC insured because I put 10% down so TD forced me to pay my property taxes with them. My parking spot is a separate property according to the city so I pay that out of my own pocket it's so complicated to have the bank pay out of that account
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jvnanu wrote: I appreciate the advice but I think you're misunderstanding. My mortgage agreement with my lender (MCAP... well, whoever MCAP manages it for I forget the exact name) is such that they will take out 1/12 of my total property taxes out of my account together with my monthly mortgage payments. These extra withdrawals will go into an account from which they will pay the city. I can not opt out of this. If I were to pay the city myself, the lender would still take that money out and leave it in the account. In that case, the city would obviously not send a bill to the lender, so a bunch of money would be siting in an account for 5 years until the mortgage term ends and they throw any extra amount to the remaining balance. I'd be giving my lender a $3000 annual interest free loan. Based on this, I do not have the option to pay the city myself. I must make payments through my lender.

My questions specifically are:

The first payments will be due before the lender has taken enough to cover them. Will I be charged interest on the "overdraft" amount that the lender needs to use to cover the taxes, and can I avoid this by making a lump sum payment, either to the lender, or to the city, to cover this difference?
No I'm recommending to pay directly to the city, only the amount that would be owing above and beyond what you've paid to your lender.

i.e. if your tax bill to the city will be $1000, and your lender will have taken just $800 from you as of the tax bill due date, then pay the city directly the extra $200 to ensure you aren't charged interest on anything. Once you pay the city, you should immediately call your lender and advise them you've made a $200 payment directly to the city, so they can adjust what they pay the city accordingly ($800 instead of $1000).

Or alternatively on the mortgage payment just before the tax due date, tell your lender to take out an additional $200 from your chequing account to go specifically towards taxes.

This all involves you keeping track of city tax amounts and due dates, and how much the lender is taking off each payment. And also assumes the lender will allow for doing these 1-time adjustments. Only way to know for sure is to ask them.
When does the lender consider me to have the 20% equity required to opt out of this arrangement? Is it when my payments reduce the principal remaining to 80% of the purchase price, or to 80% of the appraised value? If the latter, what is the process that I need to go through to have the home appraised, and demonstrate to the lender that I've reached that 20% equity benchmark.
Every lender has different policies, so you really need to ask this question directly to the lender.
[OP]
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Dec 27, 2013
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Ah, thanks Rob. I was the one who misunderstood.

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