Why does the bank want to pay my property taxes for me?
When you buy a home using bank financing, your bank will offer, or in some cases require, that you pay the home’s property taxes directly to the bank. The bank submits your tax payment to the municipality on your behalf. However, instead of you sending in two payments, one for the mortgage and one for the tax payment, the bank adds your property tax payment to your mortgage payment. On the surface, this seems to be a valuable and convenient service as it is one less bill to manage. However, the actual reason the bank provides this option is to reduce the banks lending risk.
What do my property taxes have to do with my mortgage?
In the event you do not pay the property taxes, your local municipality will eventually put a caveat (registration) against the title of your home. In a forced sale, municipal taxes are recovered ahead of any bank mortgages. Banks do not like to see added risk so they will usually pay the tax arrears back to the municipality and initiate a foreclosure action against the homeowner to recover the full amount owed to them (principal, interest, taxes, and legal cost). By maintaining your property taxes current, the bank remains in better control at reduced risk.
Why not let the bank take care my property taxes?
Having the bank take control of your property tax payment can lead to misunderstandings and even foreclosure and the loss of your home. Our office has seen this exact scenario play out a few times.
The amount the bank sets aside to pays the property taxes has to be estimated. The bank places those funds in a tax account. Because the bank estimates, the final bill can be higher or lower than what the bank expected. This creates a surplus or deficit in the property tax account. Miscommunications can and do occur between the lenders and municipal tax departments. The bank may be under the impression there are no tax arrears owing. Meanwhile, the municipality is short of funds.
If the arrears are left unchecked, the municipality can issue a caveat against title for the unpaid balance. The homeowner then becomes responsible for added legal fees. These legal fees can accumulate rapidly. A small monthly problem soon becomes a significant, bulk amount owing. Even though the homeowner was under the impression they were paying proper monthly tax and mortgage payments, they are still ultimately responsible for the errors of the bank or municipality.
Are there measures I can take to prevent this from happening if my bank insists on remitting property taxes for me?
Some banks require they collect and remit property tax. You may want to search for a bank that allows you to control your finances better. If your bank insists on managing the property tax, take care to review your tax statements every year to ensure that you do not have any additional balance owing, and take immediate action if you do. If you are not receiving a tax statement, call your municipality and request one. Do not assume that your bank will take care of your interests. Some minor bookkeeping now might help you avoid a big surprise in the future.
