Mortgage Basics to keep you in the Know – Property Taxes

General Pam Pikkert 25 Aug

Mortgage Basics to keep you in the Know – Property Taxes

Sometimes it is a good idea to revisit the basics when looking at a complex thing like a mortgage.  There can be misunderstandings which crop up.   The mortgage process can be very stressful as you wait for some anonymous entity top decide whether or not you are able to buy the home of your dreams.  It is no wonder that things can get missed.  Fear not!  We will take a look at some of the basics so you can avoid things best avoided.

Property Taxes – There are 3 ways to pay the property taxes.

  1. Have your mortgage company collect them with your mortgage payment. This can be a nice way to keep the withdrawals from your account to a minimum.  The taxes are collected at the same time as your mortgage payment and remitted to the municipality on your behalf.  Your property tax bill will still be sent to you but it will clearly show that the taxes have been paid by the mortgage company.  Things to make note of: some banks charge a fee for this service which could be avoided if you chose a different option.
  2. TIPPS or the Tax Installment Program Payment System – Most municipalities allow you to sign up for free for the program. Generally an amount of 1/12 of the tax amount is withdrawn from your bank account on the last business day of the month.  Your property tax bill will come to you showing that you have opted in to the TIPPS program.  Depending what time of year you took possession of the home the amount can reflect a balance owing or a tax credit but you can rest assured that you are OK and will not have to come up with a large amount at the end of the year.
  3. Lump Sum – You can make a once a year payment to the municipality. This is not ideal for everyone as it requires you to come up with a large amount of funds. Your tax bill will show clearly that the funds are outstanding.

What else should you know about property taxes?

  1. Tax Adjustment – Depending on the time of year that you are purchasing your home, you may have to reimburse the seller if they have pre-paid the taxes for the year. This is why you are required to have an extra 1.5% of the purchase price available for closing costs.   Your lawyer will be the one to determine this and if you opt for the TIPPS program you can avoid the extra lump sum all together.
  2. You have to pay your taxes. We all know that but you should know what happens if you do not.  First of all you will begin to incur penalties and extra fees.  Then they can put a tax lien on the title and finally they can seize the property and sell it.   Mortgage lenders have the legal right to ask for verification that your property taxes are being paid.  Should they discover you have not done so, they will charge you a fee and take over the payment of the property taxes.  At that time they will collect a monthly amount from you to cover the past due and the amount owing going forward.  Taxes trump mortgages and the bank could lose out if the property was siezed.   It can be very hard to get a mortgage if you have a tax lien.  Lenders tend to shy away from this scenario.
  3. It is not always up to you. Given the issues raised in the previous point, many banks will not allow to you to choose the yearly option.  They require verification that you are on the TIPPS program or have the taxes included in the mortgage

I strongly recommend that after your mortgage funds you contact the mortgage company and confirm that you are set up the way you wanted.  I have witnessed a few cases where things went sideways and all of a sudden people had to pay double property taxes for a year until they were caught up.

And now you know how to navigate property taxes like a pro.

What does the future hold for mortgages?

General Pam Pikkert 4 Aug

 

There have been a dizzying number of changes to the mortgage rules over the last 6 or 7 years.  The red hot markets in Toronto and Vancouver coupled with increased household debt and concerns over the risk to the Canadian tax payer through CMHC have caused the federal government to step in repeatedly.  Here are a few of the changes we have seen.

  • Maximum amortization from 40 years to 25 years.
  • Mortgages must qualify on the stress test rate which is currently 4.84%.
  • Homes over $500,000 need 10% down on any amount over that threshold.
  • Homes over $1,000,000 are not eligible for mortgage insurance.
  • Refinances can no longer be guaranteed by mortgage default insurance.
  • Foreign buyers faced additional restrictions.
  • Home Equity Lines of Credit are maxed at 65% of the property’s value.
  • Refinances are maxed at 80%.
  • All outstanding credit cards and lines of credit have to be included at a 3% repayment.
  • Increased mortgage default insurance premiums.

This list could go on but these are some of the major ones.   Recently the powers that be have announced another round of proposed changes which, if history holds true, we would anticipate to come into existence in October of this year.

  1. The overall indebtedness of Canadian households through Home Equity Lines of Credit is a concern which may signal a further set of limitations to this type of mortgage.
  2. There is consideration being given to a risk sharing model between the mortgage insurers and the banks. At the present time if you were to default on your mortgage the lender has the assurance that the default insurance will make them whole.  Going forward this may not be the case.

How could you be affected?  There will likely be an increased level of scrutiny applied to mortgage applications.  If your credit is blemished or less than perfect you could face higher rates or be shut out of buying a home.  They will likely also want to see savings beyond just the down payment and closing costs.

The fact of the matter is that if a bank has an increased risk overall they are going to certainly be more selective in who they lend their money to.  The days of the best 5 year rate for everyone may be a thing of the past.

  1. Currently there are lenders in Canada who charge slightly higher rates and make allowances for damaged credit, short self-employment tenure or other issues a borrower may be facing. Though these companies have nowhere near the lose lending guidelines in the US which led to the melt down, the government would like all lenders in Canada to abide by the same guidelines and looking at ways to bring this into reality.

We will have to wait and see if these or other changes are actually implemented. It is fair to say that until the government is satisfied the housing sector no longer poses a threat to the economy, it will remain at risk of further changes.   Long story short, if you are considering purchasing then you may want to proceed sooner rather than later.  Rates have risen recently and there is uncertainty over the future of mortgages.  Call a well-qualified mortgage professional today for assistance.

Is the Bank of Canada signalling that more mortgage rule changes are coming?