Paying property taxes is an essential responsibility for homeowners, as these funds support local government services and infrastructure. When it comes to managing property taxes, homeowners often face the decision of whether to pay them directly to the tax authority or through their mortgage lender. This choice can have significant implications for budgeting, convenience, and financial planning. Let’s examine whether this approach aligns with your financial goals and preferences, or if other options may be more suitable for your situation.

The Advantages of Paying Property Taxes Through Your Mortgage

Paying property taxes through your mortgage offers several advantages that can simplify your financial planning and homeownership experience. Here are some of the key benefits:

Simplified Budgeting – Combining your property taxes with your monthly mortgage payment simplifies your financial responsibilities. You make a single payment to your mortgage lender, who then disburses the funds to cover your mortgage principal, interest, and property taxes. Since your property taxes are spread out over the year, you can anticipate and budget for consistent monthly payments, making it easier to manage your finances and avoid unexpected lump-sum tax bills.

Elimination of Lump Sum Payments – Property taxes are typically assessed annually or semi-annually, resulting in substantial lump-sum payments for homeowners. By paying through your mortgage, you eliminate the need to come up with a large amount of money all at once. Without the burden of a significant tax bill looming, you can better allocate your resources to other financial priorities, such as home maintenance, savings, or investments.

Lower Risk of Tax Delinquency – Paying property taxes through your mortgage ensures that your taxes are paid on time. Mortgage lenders are responsible for making timely tax payments, reducing the risk of tax delinquency and potential penalties. With tax payments integrated into your mortgage, you can have peace of mind knowing that your property remains in good standing with local tax authorities, preventing any potential tax liens or legal complications.

The Drawbacks of Paying Property Taxes Through Your Mortgage

While paying property taxes through your mortgage offers convenience, it also comes with some drawbacks that you should consider before making this choice:

Higher Monthly Payments – When property taxes are added to your mortgage payment, your monthly housing costs will increase. This can strain your monthly budget, particularly if you’re on a tight financial plan. Lenders often require homeowners to maintain an escrow cushion, which is an extra amount added to your monthly payment to ensure they have enough funds to cover property taxes and insurance. This cushion can further increase your monthly expenses.

Loss of Control over Tax Payments – When property taxes are paid through your mortgage, you relinquish direct control over tax payments. Your mortgage lender handles the disbursement of tax funds, which means you may not know when and how they pay your property taxes. If there are discrepancies or issues with your property tax assessment, you may have limited ability to address them directly with the tax authority since your lender manages the payments on your behalf.

Potential Escrow Shortages – Property tax amounts can change from year to year due to factors such as reassessment or changes in local tax rates. Your lender may adjust your monthly payments to account for these fluctuations, potentially resulting in higher payments and escrow shortages. Escrow shortages can lead to unexpected increases in your monthly mortgage payments. These fluctuations can cause financial stress if you’re unprepared for the higher costs.

Alternatives to Paying Property Taxes Through Your Mortgage

Paying property taxes directly through your mortgage is not the only option for homeowners. Depending on your financial preferences and goals, there are alternative methods for managing property tax payments:

Direct Payments – With this approach, you pay property taxes directly to the tax authority when the bills are due. This method offers complete control over when and how you make your tax payments. You can take advantage of early payment discounts or choose to set aside funds in advance, potentially earning interest on the money before it’s due.

Property Tax Savings Accounts – Open a separate savings account specifically for property taxes. Each month, set aside a portion of your income into this account to cover your annual tax bill. This method allows you to maintain control over your tax payments while earmarking funds exclusively for this purpose. It provides transparency and separation of property tax funds from your regular expenses.

Third-Party Escrow Services – Some homeowners hire third-party escrow services to manage their property tax payments. These companies take responsibility for collecting funds and ensuring timely payments to the tax authority. Escrow services can provide peace of mind by handling all aspects of tax payment management, including monitoring changes in tax assessments and handling any discrepancies with tax authorities.

To make the best choice for your circumstances, consider your financial stability, budgeting preferences, mortgage lender requirements, local property tax rates, and personal financial objectives. Evaluating these factors will help you determine whether paying property taxes through your mortgage or opting for an alternative method is the right path to meet your financial goals while ensuring your property taxes are managed effectively and on time.

The Canadian real estate market has seen significant price increases in recent years, this growth has boosted home equity for many homeowners. With rising home values comes a noticeable uptick in home equity loans. Many homeowners are tapping into their home equity to finance everything from renovations to consolidating high-interest debts.

Home equity is essentially the financial stake you have in your house. It’s the monetary difference between your home’s current market value and the remaining balance on your mortgage. When property values in your area rise, the value of your home increases, and so does your home equity!

With longer life expectancies and concerns about the adequacy of retirement savings, some Canadians view their home equity as a sort of retirement nest egg.  Older homeowners opt to downsize by selling their family homes to move into smaller properties or condominiums. This allows them to release the equity built up in their homes for retirement or other needs.

Home equity can be a powerful financial tool. Here are a few ways you can take advantage of it.

Access Fresh Funds by Refinancing Your Home

When market conditions improve and lower interest rates become available, you can renegotiate the terms of your existing mortgage and replace it with a new one. If you’ve owned your home for several years and have dutifully made mortgage payments, you’ve likely built-up considerable equity. Refinancing allows you to tap into this to finance major expenses.

Refinancing can also allow you to take advantage of lower interest rates, thus reducing your monthly mortgage payments. This can translate into significant savings over the life of your loan. Keep in mind that extending your repayment period might lead to higher overall interest costs.

Before you decide to refinance, it’s crucial to weigh the costs against the benefits. Just like your original mortgage, refinancing comes with closing costs. These can include application fees, legal fees, appraisal fees, and more.

Note that because you are effectively breaking the initial mortgage contract by refinancing, most lenders impose a penalty to compensate for the financial loss they incur. Generally, the closer you are to the end of your mortgage term, the less severe the penalty will be. This is because the lender stands to lose less interest over a shorter period. In some cases, you can negotiate the prepayment penalty with your lender, especially if you plan to stick with the same lender for your refinanced mortgage.

Take Advantage of a Home Equity Line of Credit (HELOC)

A Home Equity Line of Credit (HELOC) operates like a credit card but uses your home as collateral. It’s a type of loan that provides you with a revolving line of credit based on the equity you’ve built up in your home. You can borrow any amount at any time. This can be especially useful for ongoing expenses like home renovations or investments.

Be mindful of the fact that, unlike traditional home loans, HELOCs usually come with variable interest rates, meaning the rates can rise or fall over time. If interest rates increase, so do your monthly payments, which can lead to higher repayment costs. Keep a close eye on interest rate trends. If rates start climbing, consider paying down your HELOC faster to minimize the impact of future rate hikes.

Leverage Your Home Equity for Other Investments

Funds from a home equity loan, HELOC, or cash-out refinance gives you the opportunity to invest in other properties, the stock market, start a business, or fund other income-generating ventures. If the investment does well, it could yield a return rate surpassing your equity loan’s interest rate. This difference, less any loan costs, is your net profit. The interest on the money borrowed against your home equity to buy an income-generating property or invest in a business may be tax-deductible. But you must meet specific requirements set by the Canada Revenue Agency.

If you cannot repay the loan, you could face the harsh reality of losing your home. It’s a sobering thought that underscores the need to make informed, prudent financial decisions.

Increase Your Home’s Value Through Home Improvements

Undertaking home improvements can increase the value of your property. Renovations such as upgrading the kitchen, adding a bathroom, or finishing a basement are known to yield a high return on investment. When you decide to sell your home, you can recoup your investment or even make a profit. Improvements can make your home more comfortable, practical, and enjoyable. For example, expanding your living space could accommodate a growing family, while upgrading insulation can enhance energy efficiency and reduce utility costs. In Canada, certain types of home improvements can provide tax benefits, such as the Home Accessibility Tax Credit (HATC). This allows deductions for eligible home renovation expenses for seniors and persons with disabilities.

Not all home improvements add significant value to a home, and it’s possible to spend more on renovations than you can recoup in a sale. This is known as overcapitalization. Doing your research and consulting with one of our team member before embarking on any significant projects is essential.

Are you considering selling your home? The Barnett Real Estate Team understands what makes a property sell at the highest price possible. From strategic home staging to effective marketing, we ensure your home stands out in the market, attracting competitive offers.

Contact us for a consultation.

When eager new homebuyers begin saving up for a home, it’s easy to fall into the trap of putting on the blinders and fixating on saving up towards one number in particular.

However, buyers can often forget to factor in the additional secondary and tertiary costs it takes to buy a home. For all buyers, new or recurring, these are critically important costs to know about.

So, whether you’re a first-time buyer or have set your sights on moving up, here’s a breakdown of some of the true costs you need to consider when buying a home.

The Deposit

The first expense you should plan for is the deposit. This is a percentage of the total cost of the home that gets paid to the seller or Seller’s agent brokerage right away to essentially “hold” the sale and show the seller you are committed to the purchase. Typically, a deposit is 5-10% of the total purchase price and is required to be paid within 24 hours of the offer.

The deposit also must be made in the form of a certified check, bank draft, wire transfer or Etransfer, which means a homebuyer will need fast access to funds when putting in offers. This money is typically paid to the Seller’s Realtor’s Brokerage company or sometimes to the seller’s lawyer to be held in trust until the home closes.

The higher your deposit, the more committed you may look to sellers and the more desirable your offer comes across. Once the deal is finalized, your deposit money can go towards closing costs or towards your down payment, which brings us to the next cost you need to plan for.

The Down Payment

A down payment is different from a deposit. The down payment is a lump sum payment that goes toward the final purchase of your home. In Canada, there are some rules around down payments. The minimum down payment you can pay is 5% for a home valued at $499,000 or less and 10% for homes valued at $500,000-$999,000. For homes over $1 million, buyers are required to pay at least 20%.

If possible, paying more than the minimum down payment amount is better because it means you will pay your mortgage off sooner, pay less interest, and build equity more quickly.

There’s nothing more fun than fantasizing about what your next home could look like. However, with the help of our Featured Listings page here, you don’t have to daydream quite as hard.

Your Mortgage And Interest Rates

Once your down payment has been accepted, you can deduct that amount from the final sales price of your new home. To account for the rest of the sales price, you’ll need to take out a mortgage.

Mortgages are essentially loans for homes. The total amount of your mortgage depends on a few factors, such as the cost of the home you’d like to buy, the amount of your down payment, what you qualify for based on your annual income, what your monthly expenses are, and your employment history.

Generally speaking, it’s either banks or private mortgage brokers who grant you a mortgage. Whoever you secure your mortgage from, you’ll have agreed on the total amount of your loan and the structure of how you’ll pay it back. In most cases, it’s in the form of a monthly payment to your lender, which will include an interest rate.

This means that if you’ve agreed to put down $2,000 per month towards your home, for example, this fee, plus whatever your mortgage interest rates are, will go to your lender.

What About Mortgage Insurance?

If you are unable to pay the minimum down payment for your purchase, you may still be able to get a mortgage, however, you will be required to purchase mortgage insurance

Mortgage insurance is an added cost that protects the lender since the lender is typically taking on more risk with a lower down payment.

Are you planning on becoming a first-time homebuyer? Ensure you’re well-informed about everything you need to know about your upcoming purchase by reading these related posts:

• 5 First-Time Home Buyer Mistakes To Avoid
• First-Time Home Buyer Grants in Ontario
• Our Top 8 First-Time Buyer FAQs

Land Transfer Tax

The province of Ontario requires homebuyers to pay them an additional fee called the Land Transfer Tax. Essentially, this reflects the provincial government’s cost of permitting you to transfer the title of property between their jurisdiction.

While each province has its own set of Land Transfer Tax rates, the amount you have to pay increases depending on the cost of your new home. The more expensive your new home, the higher the percentage of its value you have to pay in Land Transfer Tax.

In Ontario, the set of Land Transfer Tax rates ranges from 0.5% to up to 2.5% of your home’s value. However, if you’re buying a home in the Greater Toronto Area, the City of Toronto requires buyers to pay an additional municipal Land Transfer Tax alongside the provincial tax.

The good news for first-time homebuyers is that you may be eligible to have all or part of this one-time fee refunded. Eligibility for this refund requires buyers to qualify based on these criteria:

• The buyer must be a Canadian citizen or permanent resident of Canada
• The buyer must be older than 18 years
• The buyer must occupy the home within nine months of purchase
• The buyer cannot have previously owned a home anywhere in the world
• The buyer’s spouse cannot have owned a home while being your spouse

If that applies to you, then you can apply for a refund of the full amount of your Land Transfer Tax or up to a maximum of $4,000.

Lawyers’ Fees

In order for both the buying and selling parties to ensure they’re conducting a legitimate and viable transaction, it’s a real estate lawyers’ duty to review and approve all of the necessary paperwork and legal documents that are included in a transaction.

While both the buying and selling parties hire their own respective lawyers, both legal representatives work together to ensure the real estate transaction is completed smoothly and no contractual or legal details are overlooked.

As you might imagine, there are a lot of formalities and details that go into a real estate transaction, which is why it’s crucial you hire a dedicated real estate lawyer who has experience facilitating these types of deals. As with all lawyers, though, their services come with a fee, which you’ll need to factor into your overall budget as a homebuyer.

Whether you’ve already got an idea of who you’d like to hire or need help finding a legal representative, we work with a set of highly respected and experienced real estate-specific lawyers that we’re always prepared to recommend to our clients should they need it.

There are no ifs, ands, or buts about it — the safest way to buy a new home is through the help of a knowledgeable and experienced local Realtor®. Learn more about what we do, how we help, and how you can find the Realtor® that’s right for you here:

• How To Hire a Real Estate Agent As a Buyer
• Why You Should Work With a Realtor®
• 8 Steps to Finding the Right Real Estate Agent

Your Homeowners’ Insurance

Homeowners’ insurance is a form of property insurance that protects you, the homeowner, from any damages to you or your property once you own your new home. It’s also a requirement to get a mortgage.

In paying a monthly fee to a homeowners’ insurance provider, you are in essence paying for peace of mind. If any damages were to occur to you or your new home, your insurance provider would provide you with funds (up to a certain number) to pay for the cost of fixing the damages.

Although all insurance plans and providers are different, most homeowners’ insurance policies generally cover the costs of things like interior damage, exterior damage, the loss or damage of personal assets or possessions, and any personal injury that occurs on your property.

Interested in learning more about how we can help you make your upcoming home purchase the best buy of your life? Read all about our buying process and how we’ve helped buyers just like you find their dream homes the first time here:

• How We Help Buyers
• Our Buyers’ Guide