Jun 25, 2023
When it comes to mortgage financing, the term “escrow” is more commonly used in the United States than in Canada. However, escrow accounts do exist in Canada, particularly in relation to property taxes. In this article, we will explore what escrow means in Canada, what an escrow agent is, how it relates to property tax accounts and the benefits and considerations associated with using an escrow account.
When purchasing a house and obtaining a mortgage in Canada, one of your responsibilities is to pay the municipality’s annual property taxes. In some cases, lenders offer the option to collect these property taxes on your behalf and hold them in an escrow account. This places the lender in the position of the escrow agent, which is a neutral third party responsible for holding and managing funds. The escrow agent will also manage any documents, ensure compliance and disburse funds or assets at the appropriate time for all parties involved.
Your property tax amount will be divided into monthly or biweekly segments and added to your regular mortgage payment. Each payment made will be allocated to the escrow account. This will be part of your escrow agreement and is common in real estate transactions.
Using an escrow account for property tax payments offers several advantages, including convenience and ease of budgeting. When your lender handles the property tax payment, you have one less bill to worry about and don’t need to remember to make separate payments. Furthermore, the municipality sends the tax invoice directly to your lender, ensuring that payments are made on time. Additionally, by spreading out the property tax payments throughout the year, you can avoid the need to budget for a large lump sum payment.
In most cases, the use of an escrow account is optional. However, some lenders may require it, especially for high-ratio mortgages or those with less than a 20% down payment. Lenders perceive higher risk in these situations, and by collecting and paying property taxes in escrow, they ensure that the taxes are paid and prevent potential losses resulting from property tax arrears.
If you’re not required to use an escrow account for your mortgage and prefer to handle property tax payments yourself, you have the option to pay the municipality directly. However, this requires discipline to save throughout the year or make a lump sum payment when taxes are due. Some municipalities such as Calgary and Edmonton offer the option to pay your taxes monthly through their TIPP program. However, many homeowners choose escrow to alleviate the need for independent savings or multiple monthly payments coming out of the account.
There may be instances where the funds in your escrow account are insufficient to cover the property taxes when they are due. This can occur if you purchased a home close to the property tax deadline or if there was a miscalculation in the periodic escrow payment. In such cases, most lenders allow the escrow account to have a negative balance for a certain period. Once the property taxes are paid, any deficient balance is adjusted by increasing the periodic payment amount. Lenders always notify clients in advance of any changes to the property tax payment collected in escrow.
Sometimes, the lender may collect more money than necessary to cover the property taxes, resulting in a surplus balance in your escrow account. In such situations, you can request a refund of the surplus to your bank account. Alternatively, you may choose to keep the surplus in the account and have your lender reduce the property tax portion of your mortgage payment. This allows you to enjoy lower mortgage payments until the surplus is fully utilized.
Not all escrow accounts in Canada earn interest. If the option is available, it may be more beneficial to collect interest on your own rather than relying on an escrow account that does not pay interest. While the difference may seem minimal over a year, it can add up over the life.
In conclusion, while escrow accounts are not as widely used in Canada as in the United States, they offer several advantages for homeowners when it comes to property tax payments. By utilizing an escrow account, homeowners can benefit from the convenience of having their taxes included in their regular mortgage payments, ensuring timely payments and easing budgeting efforts. While the use of an escrow account is typically optional, it may be required in certain situations. Homeowners who prefer to handle tax payments independently have the alternative of paying the municipality directly. However, it’s important to consider factors such as discipline and budgeting requirements. Understanding escrow in Canada provides homeowners with valuable options to effectively manage their property taxes and finances.
Hi! I’m Erin Crocker. I’m a real estate lawyer with over 10 years of experience in Alberta and British Columbia real estate law. I love technology and efficiency. I’m on a mission to create a modern, digital closing experience for buyers and sellers through technology, transparency and sharing knowledge.
