Congratulations! You’ve finally purchased your first home. If you’ve been a lifelong renter, up until this point, it’s important to be aware of the new responsibilities that come with being a homeowner. As a renter, all you had to worry about was paying your rent and possibly some utilities each month. Not only does homeownership come with a lot more responsibilities, there are extra monthly carrying costs you’ll need to budget for – the biggest one of which will likely be your property taxes.
Property taxes are charged by the municipality, and are used to pay for services such as garbage and recycling collection, snow removal, street lighting, policing, fire protection and more. How much you have to pay depends on the area you live in, as well as the value of your property (not the size!) and of the other properties around you.
Here’s more on how your property taxes are calculated each year, and how you can pay them:
Property Tax Rates
Just because two homes are listed for the same purchase price doesn’t mean they will have the same property taxes. For example, one 600 sq. ft. condo could be charged $700/year in property taxes, while another 600 sq. ft. condo in a different neighbourhood could be charged $1,500/year. When you start your home search, it’s important to consider not only how you like the property itself but also what its property tax rate is. Property tax rates vary across all municipalities and typically fall between 0.50-2.50%.
How are Property Taxes Calculated?
It’s a common misconception that property taxes are determined by the physical size of your property – but that’s not exactly true. Instead, the assessed market value of your home is used to determine how much you’ll pay. Every year, municipalities do two things: 1) assess the market value of all its properties and 2) update their property tax rate. The value of your home is then multiplied by your tax rate, to determine your annual property taxes. For example, if your home was valued at $400,000 and your tax rate was 1.00%, you would have to pay:
Market Value of Home x Property Tax Rate = Annual Property Taxes
$400,000 x 1.00% = $4,000
Budgeting for Property Taxes
It’s important to budget for property taxes as both a closing cost and an ongoing monthly carrying cost. When you first purchase your home, the seller may have prepaid their property taxes for the year. If that’s the case, you’ll need to reimburse them a prorated amount for the number of days you own the home which have already been paid for. Once the home is yours, you’ll need to consider how you want to budget for your property taxes each year. Property taxes can be paid annually, although you may also have to option to pay in monthly or quarterly instalments.
How to Pay Property Taxes
This is the number one question many first-time homebuyers have about property taxes and here’s the answer: you can either pay the municipality directly, or you can have them included in your monthly mortgage payments. For example, if you have a monthly mortgage payment of $2,800 and your property taxes are $4,200 annually, your monthly mortgage payments including property taxes could be $2,800 + ($4,200 / 12 months) = $3,150. If you choose to pay your municipality directly, it’s still a good idea to budget and save for this cost each month, so you’re not left scrambling to come up with the full amount right before the due date.