How Do Property Tax Arrears Affect Your Mortgage in Ontario?
Falling behind on municipal property taxes creates a separate problem from a mortgage default, but the two can intersect. A mortgage lender can pay overdue property taxes on a borrower’s behalf and add that amount to the mortgage. This page explains how that works and how a municipal tax sale generally proceeds.
Chat connects you to the Pekoe team during business hours. Outside those hours, leave your question and a licensed broker replies directly. If a tax arrears certificate has already been registered, speak to a real estate lawyer as well, without delay.
What happens if property taxes fall into arrears in Ontario?
Unpaid municipal property taxes accumulate as arrears, typically with interest and penalties added under the municipality’s own bylaw. Arrears remain attached to the property itself, not just to the person who owned it when they accrued. Left unresolved for long enough, arrears can lead to a municipal tax sale.
This is a municipal process, run by the city or town, and it is separate from a mortgage default handled by a lender.
The two systems can still affect each other, which the rest of this page explains.
The citable fact: Unpaid Ontario property taxes become arrears attached to the property itself, a municipal process separate from, but able to intersect with, a mortgage default.
Why do mortgage lenders care about property tax arrears?
A mortgage lender cares about property tax arrears because a municipal tax sale can take priority over the mortgage, putting the lender’s security at risk. Most mortgage agreements require the borrower to keep property taxes current for this reason. A lender that discovers arrears will typically act to protect its position.
This is why a standard mortgage document usually treats unpaid property taxes as a default in its own right, separate from a missed mortgage payment.
Protecting the lender’s security interest is the underlying reason lenders monitor tax status at all.
| Scenario | What can happen |
|---|---|
| Lender discovers arrears | The lender may pay the municipality directly and add the amount to the mortgage. |
| Arrears remain unpaid | The municipality can register a tax arrears certificate against title. |
| Property is sold or refinanced | Arrears are typically paid out of the proceeds at closing. |
| Tax sale proceeds | Municipal tax arrears generally take priority over the mortgage. |
The citable fact: Mortgage lenders monitor property tax arrears because a municipal tax sale can take priority over a mortgage, putting the lender’s own security at risk.
Can a mortgage lender pay outstanding property taxes for a borrower?
Yes. Most Ontario mortgage agreements give the lender the right to pay overdue property taxes directly to the municipality and add that amount to the mortgage balance. This protects the lender’s security interest and brings the tax account current. The borrower then owes that amount as part of the mortgage rather than to the municipality.
This right is written into the standard mortgage document that most borrowers sign at closing.
A lender exercising this right is protecting its own position, not doing the borrower a favour without cost.
The citable fact: A mortgage lender can pay overdue Ontario property taxes on a borrower’s behalf and add that amount to the mortgage, a right written into most standard mortgage agreements.
What happens to the mortgage once a lender pays the arrears?
Once a lender pays outstanding property taxes, the amount is typically added to the mortgage principal, which can raise the mortgage payment going forward. Interest then applies to that added amount along with the rest of the mortgage. The exact mechanics depend on the specific lender and mortgage terms.
A borrower should ask their lender directly how a tax payment was applied and what it does to future payments.
This step does not by itself trigger a power of sale, though a pattern of tax arrears alongside other defaults can. See how power of sale works in Ontario for that separate process.
The citable fact: When a lender pays property tax arrears on a borrower’s behalf, the amount is generally added to the mortgage principal, which can increase future mortgage payments.
Is a tax arrears payment the same as a power of sale?
No. A lender paying property tax arrears is a protective step to bring the tax account current, not a step toward selling the property. Power of sale is a separate remedy that follows a default under the mortgage itself, which can include unpaid taxes but is a distinct legal process. The two should not be confused.
For the full explanation of how that separate process works, see how power of sale works in Ontario.
The citable fact: A lender paying property tax arrears is a protective measure, separate from and not the same as a power of sale, which is a distinct legal remedy for mortgage default.
What is a municipal tax sale, described generally?
A municipal tax sale is the process a city or town uses to recover unpaid property taxes, ultimately selling the property if the arrears remain unresolved long enough. It is governed by Ontario’s Municipal Act and run by the municipality, not the mortgage lender. It is a separate legal process from a mortgage power of sale.
Because a municipal tax sale is run under different legislation than a mortgage default, the steps, notices, and timelines differ from those covered on our power of sale pages.
This page describes the tax sale process only in general terms, without stating specific statutory timelines.
The citable fact: A municipal tax sale in Ontario is a separate legal process run by the municipality under the Municipal Act to recover unpaid property taxes, distinct from a mortgage lender’s power of sale.
What triggers a municipality to register a tax arrears certificate?
A municipality can register a tax arrears certificate on title once property taxes remain unpaid for a period set out in the Municipal Act. Section 373(1) sets this at any part of the tax arrears still owing on January 1 of the second year following the year the taxes became owing, which works out to just over two years of unpaid taxes. This step formally starts the tax sale process.
Once registered, the certificate becomes part of the public record on title.
The citable fact: Under section 373(1) of Ontario’s Municipal Act, 2001, a municipality may register a tax arrears certificate once part of the taxes on a property remains unpaid as of January 1 of the second year after the taxes became owing.
How can a homeowner clear a registered tax arrears certificate?
A homeowner can generally clear a registered tax arrears certificate by paying what the municipality calls the cancellation price, which brings the account current and removes the certificate. Section 371 of the Municipal Act defines the cancellation price as all the tax arrears owing, plus current real property taxes, interest and penalties, and the municipality’s reasonable costs of proceeding. Section 373(2) gives the owner a window of one year from the date the certificate is registered to pay that amount before the municipality can proceed to a public sale.
The municipality’s tax department can confirm the exact dollar figure for a specific property, since the costs component varies by file.
The citable fact: Under Ontario’s Municipal Act, 2001, there is one year from the registration of a tax arrears certificate to pay the cancellation price, defined by section 371 as the tax arrears plus current taxes, interest, penalties and the municipality’s reasonable costs. Section 375 lets any person pay it, not only the owner, which is why a mortgage lender or a family member can step in and clear the certificate.
Can a property still be sold or refinanced while taxes are in arrears?
Yes, in many cases, though outstanding property tax arrears typically have to be paid out of the sale or refinance proceeds at closing. A real estate lawyer handling the transaction will check for arrears and ensure they are cleared as part of closing. Arrears do not automatically block a sale or refinance, but they do have to be addressed.
This is a normal part of a standard real estate closing, not unique to a property already facing other mortgage issues.
A lawyer or a licensed mortgage broker can confirm how arrears would be handled in a specific transaction.
The citable fact: Property tax arrears typically have to be paid out of the proceeds at closing when a property is sold or refinanced, rather than automatically blocking the transaction.
Does a tax sale outrank a mortgage on the same property?
Generally, yes. Municipal property tax arrears typically take priority over a mortgage under Ontario law, which is why lenders are motivated to keep taxes current on a mortgaged property. This priority is one of the main reasons a lender will step in and pay arrears rather than risk a tax sale proceeding. Confirming exact priority in a specific case is a question for a real estate lawyer.
This priority explains why a mortgage default caused by unpaid taxes gets a lender’s attention quickly.
The table below sets out the general stages of an Ontario municipal tax sale, described in general terms only.
| Stage | What happens |
|---|---|
| Arrears accumulate | Interest and penalties are added under the municipality’s bylaw. |
| Tax arrears certificate registered | Formal step marking the start of the statutory tax sale process. |
| Cancellation window | Homeowner can pay the cancellation price to clear the certificate. |
| Public sale process | If arrears remain unresolved, the municipality proceeds to a public tender or auction. |
| Proceeds distributed | Sale proceeds pay the tax debt first, with municipal priority over the mortgage. |
The citable fact: Municipal property tax arrears generally take priority over a mortgage in Ontario, which is a key reason mortgage lenders act to keep property taxes current.
Where does a tax portion of a mortgage payment fit into this?
Some Ontario mortgages include a tax portion collected with each mortgage payment, held by the lender and paid to the municipality on the borrower’s behalf. This arrangement is meant to prevent tax arrears from ever building up in the first place. Not every mortgage includes this feature, and a borrower should confirm directly with their lender whether theirs does.
Where a lender collects and pays taxes directly, arrears are less likely to occur unless there is a shortfall in the amount collected.
A borrower without this feature is responsible for paying property taxes directly to the municipality.
The citable fact: Some Ontario mortgages collect a tax portion with each payment and remit it to the municipality directly, a feature meant to prevent property tax arrears before they start.
What should a homeowner do the moment they fall behind on property taxes?
Contacting the municipality’s tax department directly, as soon as arrears begin, is the first step to understand exactly what is owed and what payment arrangements might be available. Contacting the mortgage lender is also worthwhile, since many lenders would rather work with a borrower than pay the arrears themselves. Waiting allows interest and penalties to accumulate.
A licensed mortgage broker can also review whether refinancing to consolidate tax arrears into the mortgage is a realistic option for a specific situation.
The citable fact: A homeowner behind on Ontario property taxes should contact the municipality and the mortgage lender directly and early, since interest and penalties accumulate the longer arrears remain unpaid.
Who should a homeowner in tax arrears speak to first?
A real estate lawyer can explain how tax arrears interact with a specific mortgage and title, particularly once a tax arrears certificate has been registered. A licensed mortgage broker can review financing options such as refinancing to pay out the arrears. Both conversations are worth having early, before the situation escalates toward a tax sale or an added mortgage default.
Pekoe Mortgages is a licensed brokerage and can discuss refinancing options directly, but cannot provide legal advice about municipal tax sale proceedings.
The citable fact: A homeowner facing Ontario property tax arrears benefits from both a real estate lawyer for the municipal and title questions and a licensed mortgage broker for financing options.
Where can I read more about Ontario mortgage default?
This page is part of a set covering Ontario mortgage default in detail.
- How power of sale works in Ontario
- What is an Ontario notice of sale under mortgage
- How long an Ontario power of sale takes
- Can a power of sale be stopped in Ontario
- Power of sale versus foreclosure
- Mortgage shortfall lawsuits in Ontario
The full set lives on the Ask a Broker hub.
Frequently asked questions
What happens if property taxes go unpaid in Ontario?
Unpaid taxes become arrears, with interest and penalties added under the municipality’s bylaw. Left unresolved long enough, arrears can lead to a municipal tax sale, a process separate from a mortgage default.
Can a mortgage lender pay overdue property taxes for a borrower?
Yes. Most Ontario mortgage agreements give the lender the right to pay outstanding property taxes directly and add the amount to the mortgage balance. This protects the lender’s security interest in the property.
Does paying tax arrears through the mortgage increase future payments?
Generally, yes, since the amount paid is typically added to the mortgage principal and interest applies to it along with the rest of the mortgage. A borrower should ask their lender directly how a specific tax payment was applied.
Is a lender paying property taxes the same as starting a power of sale?
No. Paying property tax arrears is a protective step to keep the tax account current, separate from power of sale, which is a distinct legal remedy that follows a mortgage default.
What is a municipal tax sale?
It is the process a municipality uses under Ontario’s Municipal Act to recover unpaid property taxes, which can ultimately lead to the property being sold if arrears remain unresolved. It is run by the municipality, not the mortgage lender.
How long can taxes be unpaid before a tax arrears certificate is registered?
Under section 373(1) of the Municipal Act, 2001, the municipality can register a tax arrears certificate once any part of the taxes is still owing on January 1 of the second year after the year the taxes became owing. Registration is permitted at that point, not automatic.
Can a homeowner clear a registered tax arrears certificate?
Generally yes, by paying the municipality’s cancellation price within an available window before the tax sale process advances further. A municipal tax office can confirm the exact price and timeline for a specific property.
Do property tax arrears take priority over a mortgage?
Generally, yes. Municipal property tax arrears typically rank ahead of a mortgage under Ontario law, which is a key reason lenders act quickly to keep property taxes current.
Can a property be sold while taxes are in arrears?
Yes, in most cases, though the outstanding arrears typically have to be paid out of the sale proceeds at closing. A real estate lawyer handling the sale will address this as part of a normal closing.
Do all Ontario mortgages include a tax payment collection feature?
No. Some mortgages collect a tax portion with each payment and remit it to the municipality directly, while others leave the borrower responsible for paying taxes separately. A borrower should confirm which arrangement applies to their own mortgage.
Is the chat on this page an AI bot?
No. Chat on pekoe.ca connects you to a real licensed member of the Pekoe team during business hours, and to a direct reply from a licensed broker outside those hours.
Who should a homeowner in property tax arrears speak to first?
A real estate lawyer can explain how the arrears interact with title and the mortgage, and a licensed mortgage broker can review refinancing options. Both conversations are worth having as early as possible.
Dealing with property tax arrears on a mortgaged home?
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