When you arrange a mortgage, the lender may offer to collect your property tax along with each payment and pay the municipality for you. The money goes into a property tax account (often called a tax holdback or tax account) rather than toward the loan. Some lenders require it; others leave the choice to you. This page explains how the account works and what each way of paying involves.
How a property tax account works
- The lender estimates your annual property tax from the latest bill or assessment.
- It divides that estimate across your payments for the year and adds the share to each mortgage payment.
- The tax portion goes into the tax account, not against the principal or interest.
- When the municipality’s instalments fall due, the lender pays them from the account.
- Once a year or so the lender compares what it collected with what the municipality billed, and adjusts the tax portion up or down.
With an annual tax bill of $4,800 , monthly payments carry $400 of tax each, and bi-weekly payments about $185. Your mortgage statement shows the tax portion separately from principal and interest, along with the account balance.
When a lender requires it
Lenders set this in their own policies. Many require a tax account on high-ratio (insured) mortgages, where the borrower has less equity, and leave it optional on conventional mortgages with 20% or more down; others require it on all mortgages or none. Unpaid property tax becomes a charge on the property that can rank ahead of the mortgage, which is why lenders care. What happens if you don’t pay property tax explains the lien, the penalties and the tax sale process.
If your mortgage doesn’t require it, the choice is usually made when the mortgage is set up and can often be changed at renewal.
Paying through the mortgage
What it does well
- One payment covers the mortgage and the tax, so there are no separate due dates to track.
- The lender pays on time, which avoids municipal penalties and interest for late payment.
- The annual bill is spread into equal amounts, which suits a fixed monthly budget.
What it costs
- The money sits in the lender’s account between instalments. Some lenders pay a little interest on it and some pay none, while money you set aside yourself can stay in a savings account until the bill is due.
- The estimate can be off. A higher assessment or tax rate means a top-up or a higher tax portion after the annual review; an overestimate ties up more of your money until it is refunded or credited.
- Your total payment can change mid-term even on a fixed-rate mortgage, because the tax portion is adjusted.
- If you switch lenders, the old account has to be closed out and any balance refunded or applied, and a new arrangement set up.
- You see the bill second-hand: checking the municipality’s notice yourself is still the way to spot an assessment worth appealing.
Paying the municipality yourself
What it does well
- You control the cash until each instalment is due.
- Your mortgage payment stays the same through a fixed term.
- Many municipalities offer monthly pre-authorized payment plans, which spread the bill much as a tax account does without the lender in between.
What it asks of you
- Saving for, and paying, each instalment on time. Municipalities charge penalties and interest on late tax, at rates set by each municipality.
- Keeping the lender informed if it asks for proof that the tax is paid, which some mortgage contracts require.
Choosing between them
| If you… | The trade-off |
|---|---|
| Have a mortgage that requires a tax account | The lender decides; the choice may come back at renewal or if the loan’s terms change |
| Want one payment and no due dates to track | A tax account does that, at the cost of the money sitting with the lender |
| Prefer to hold the cash and pay on time yourself | Paying directly, or through the municipality’s own instalment plan |
| Are about to switch lenders | Ask how the old account balance will be refunded and whether the new lender requires one |
The tax is one of several costs on top of the mortgage payment; the monthly cost of owning a home adds it to insurance, utilities and maintenance, and the property tax section covers how the tax itself is set in each city. More guides on the payment itself are in the mortgage payments hub.