Property Tax Payment and Your Mortgage | Tax Account Guide

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Property Tax Payment Within Your Mortgage

Property taxes represent an ongoing financial obligation for every real estate owner in Quebec. In the context of a mortgage, this obligation takes on particular significance since the lender has a direct interest in ensuring taxes are paid on time. A property tax default can create a tax lien that would take priority even over the lender's mortgage, jeopardizing their security. This is why property tax management is integrated into the mortgage relationship.

How the Tax Account Works

The property tax account, also known as a holdback or escrow account, is a mechanism through which the lender collects a fraction of the estimated annual taxes monthly and remits them to the municipality on your behalf. In practical terms, your monthly mortgage payment includes two components: the principal and interest on your loan, plus the holdback for property taxes. These holdbacks are deposited into a trust account and payments are made on the due dates set by the municipality.

Why the Lender Insists on Tax Payments

In Quebec, under the Municipal Code and the Cities and Towns Act, municipalities hold a legal hypothec on properties for unpaid taxes. This tax lien takes priority over all other hypothecs, including your lender's mortgage. This means that if the property were sold for tax default, the municipality would be paid first, before the mortgage lender. This priority hierarchy explains why lenders are particularly vigilant about property tax payment.

Managing Your Own Tax Payments

Check eligibility conditions: Some lenders allow borrowers to manage their own property tax payments if the loan-to-value ratio is below 65% and the borrower has an excellent payment history. Review your mortgage contract terms.
Submit a written request to your lender: If you are eligible, submit a written request asking for removal of the tax account. The lender may require that you provide proof of tax payment each year.
Keep your payments current: If you manage your own taxes, ensure you pay each installment before the municipal due date. Keep your payment receipts as proof to provide to your lender upon request.
Take advantage of installment options: Most Quebec municipalities offer installment plans (two to four times per year). Some also offer pre-authorized bank payments with a discount. These options facilitate budget management without a lender tax account.

Components of Property Taxes in Quebec

General property tax: based on the value recorded on the municipal assessment roll and the tax rate set annually by the municipal council.
School tax: levied by the local school service centre. Its rate has been considerably reduced and standardized across Quebec in recent years.
Special taxes: some municipalities impose additional taxes for specific services such as water, sewage, waste collection, or local improvements.
Transfer duties (welcome tax): payable upon property transfer and non-recurring. These duties are not included in the lender's tax account.

Property tax account (escrow/holdback account): A trust account managed by the mortgage lender in which monthly holdbacks deducted from the borrower's mortgage payment are accumulated, intended for the payment of municipal and school property taxes. The lender makes payments on the dates set by the municipality, thereby ensuring that taxes are paid on time and that their mortgage security is not jeopardized by a tax lien.

Frequently Asked Questions

What is a mortgage property tax account?

It is a trust account managed by your lender in which a portion of each mortgage payment is accumulated to pay your municipal and school property taxes. The lender then makes payments directly to the municipality on the due dates, ensuring your taxes are always paid on time.

Can I pay my property taxes myself instead of through the lender?

Some lenders allow this, but generally under certain conditions: a strong credit history, a loan-to-value ratio below 65%, and sometimes a formal written request. You will need to provide annual proof of payment to your lender. If your taxes go unpaid, the lender can reinstate the tax holdback account.

How is the monthly holdback amount calculated?

The lender divides the total amount of your most recent property tax bill by 12 to déterminé the monthly holdback. If taxes increase, the lender will adjust the holdback accordingly, which could increase your total mortgage payment. If a surplus accumulates, some lenders refund the difference.

What happens if I do not pay my property taxes?

The municipality can register a tax lien (legal hypothec) on your property. This lien takes priority over your conventional mortgage, meaning the municipality would be paid before your mortgage lender in a forced sale. This is why lenders require proof that your taxes are paid or manage the payments themselves.

Does the lender pay interest on funds accumulated in the tax account?

Depending on the province and lender, some interest may be credited to the tax account. In Quebec, the Consumer Protection Act provides that sums held in trust for tax payments must earn interest at the prescribed rate. In practice, the rate is often minimal.

Are school taxes also included in the tax account?

It depends on the lender. Some include municipal and school taxes in the same holdback account. Others only manage municipal taxes and leave the borrower to pay the school tax directly. Check your mortgage contract terms to déterminé which taxes are covered.