In 2014 we paid over 2 years of property taxes in a single year and we didn’t take on any debt to pay for it.
I wanted to share why that had to happen, how we did that and provide some tips based on what we went through. I want you to avoid some of the pitfalls we have seen others make with their property taxes.
As I mentioned before we purchased our house in 2011 directly from a builder and it closed in late 2012. In the city we live in a new build takes some time to be assessed before the city sends you a property tax bill. This varies from city to city but usually there is a little bit more time for a new build.
To be honest we had no idea that was the case until we heard it from one of the lenders when we were shopping our mortgage rate. He told us of a horror story of a friend of his that needed to pay over $6,000 for property taxes in one year. They didn’t have that money so they needed to take out a line of credit to pay the bill.
After hearing that we also found out that we had two options to pay for our property taxes, let the bank take out the money or pay the bill the directly ourselves.
2 Ways to Pay for your Property Taxes:
Have the Money taken out by the Bank
Basically what happens is the mortgage lender takes the money out at the same time they take out your mortgage payment. They take the estimated amount for your property taxes and divide it by the number of mortgage payments you have. That is the number that gets withdrawn every time you have a payment.
The money goes into a separate account where it stays until the bill is due. You arrange to have the tax bill sent to the bank and then they pay the bill.
- Less Worry: Most people are pretty good with having money aside for their mortgage payment. So at the same time the property tax money gets automatically withdrawn. You just get it set up once and they take care of the rest.
- Less Money in your account: If you wanted to you could set the money aside and put it in a high interest savings account. You won’t be given a ton of money by the bank for that money
- You could get charged interest: If you don’t have enough money in the account the bank will lend you the money to cover the bill and charge you interest on that money. Your payments will likely increase to make up the difference and cover the next payment.
Overall: Based on what I have read or heard you don’t really have access to the account and you get a summary at the end of the year informing you what was paid and how much money is remaining in the account.
There is a great article by Ratehub.ca that goes into more details if you want further information. You can read that here.
Pay the bill directly yourself:
You pay this bill just like any other bill. Depending on your city you might be able to pay in monthly payments but for us the payments are broken out into 6 payments over the year.
- You won’t have any extra money taken out “just in case”: The bank doesn’t want to miss a payment on a property tax bill so they will likely err on the side of caution to take out more than required. That means money out of your cash flow that could be used for other things. Depending how many payments you have a year you could put the money into a high interest savings account or even an investment (at your own risk) and get a higher rate of return.
- You can’t forget about it: You likely won’t get a lot of time in between the time you get the bill and the time the payment is due. If your city has 1-2 payments a year then the property tax bill will be large. Many people don’t have that kind of money just sitting around unless you plan for them.
Overall: More control but more responsibility to make sure that you pay the bill. Not paying your property taxes is a big deal and the city can put a lien on your house. If you do pay your bills late, stop doing that and put it into your budget to pay on time.
We fought to pay the bill ourselves and I don’t regret it. We wanted to pay the bill ourselves but the bank was hesitant since it was a “policy” because we put 10% down on our house. It was important to us it was almost a deal breaker. I might be a control freak but it makes me uncomfortable to have a major part home ownership left to a bank.
We did negotiate with the bank to pay the bill ourselves. Since we had no other debt and a good credit score the bank agreed to it.
Back to the story of our property taxes…
We closed in December 2012 and didn’t get a bill for all of 2013. I was worried it was a lost bill so I called the property tax office several times just to confirm.
Then we got a whole bunch of bills in early 2014. I mean a lot of bills…
At one point we had all of the 2013 and 2014 payments. Then another random letter came in that they reassessed the land value and we owed another $1,000. In total that year we needed to pay close to $8,000 in property taxes to cover over 2 years of property taxes. That was paid over the course of 6 months.
How did we have that much money sitting there?
We planned for it. Every week/month we set a small amount of money aside to cover the property tax bill whenever it showed up. We did not touch this money and it was never treated as money we could spend.
Just like the bank would have, we overestimated how much we thought we were going to pay and as luck would have it that is what we needed to pay. If you have a new house this will likely apply more as you might not know what your property taxes will be. It’s still important to set some money aside. There could be re-assessments at any time and cause your taxes to increase.
What about the other home owners out there? How do you take care of your property taxes? What was your highest yearly payment? Let me know in the comments.
Quote of the Week: “I don’t like paying taxes, but I like sleeping at night.” Leonardo Del Vecchio
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