Property taxes are due this week. I anticipate receiving many calls next month from people asking why their mortgage payments have increased.
The typical answer is the loan payment hasn’t changed but the property tax component has been adjusted. This stems from an inherent flaw in the system used by lenders to collect and pay taxes for their customers.
Property taxes are paid to the city twice a year, in April and October. However, the average consumer doesn’t save and spend semi-annually. Rather, spending schedules are bi-weekly or monthly, based on pay periods. Therefore, lenders create a savings plan for taxes.
When a combined mortgage and tax payment is made, the tax component isn’t paid immediately to the city. Rather, it’s saved and the accumulated balance is used to pay the tax bill when it becomes due.
For example, if property taxes are estimated to be $1,200 annually, the bank will collect $100 per month with the mortgage payment. This system is successful only if the amount collected over six months, $600, is equal to the taxes due.
However, two situations will result in a shortfall. First, if a property was purchased or refinanced within the last six months, the lender will not have received or collected six payments. Secondly, if there is an increase in the assessed value, the lender’s estimate of the funds needed would be insufficient to cover the increased taxes.
Lenders will typically cover any shortfall to ensure the tax bill is paid in full. The difference required is treated like small loan to the homeowner and it is repaid over the next six months. As a result of this extra amount owed to the lender, the tax component is adjusted and the customer’s regular payment will increase.
– Elias Metlej is a real estate lawyer with the Halifax firm Blois Nickerson & Bryson. You can write to Elias at email@example.com