Can You Refinance When Property Taxes Are in Arrears?

Falling behind on property taxes can turn a normal mortgage decision into a stressful one. You may have equity in your home and a workable plan, but the tax balance still matters because municipal taxes attach directly to the property.

The good news is that property tax arrears do not automatically make refinancing impossible. In some cases, a refinance can be structured so the outstanding taxes are paid from the new mortgage proceeds. Whether that works depends on the amount owing, available equity, existing mortgage, income, credit, property value, and the lender reviewing the file.

The earlier the situation is reviewed, the more room there may be to structure it properly.

Quick Answer

Yes, you may be able to refinance a home when property taxes are in arrears. Ontario law gives municipal property taxes a priority lien on the land ahead of most other claims, so lenders take arrears seriously. A lender may require the taxes to be paid before or as part of closing. Some borrowers use home equity to clear the balance, but approval depends on the borrower, property, lender, and full application.

 

Key Takeaways

• Property tax arrears do not automatically prevent refinancing.
• Municipal property taxes have strong priority against the property in Ontario.
• A lender will want an accurate figure for the amount owing.
• Available home equity can be an important part of the solution.
• Some refinances may pay tax arrears from mortgage proceeds.
• Waiting can increase the balance through penalties, interest, and fees.
• Bank, alternative, and private lenders may assess the same file differently.
• Every file is different, so structure matters as much as rate.

 

Table of Contents

1. Why Property Tax Arrears Matter to a Lender
2. Can Tax Arrears Be Paid Through a Refinance?
3. What Lenders May Review
4. What If Your Bank Says No?
5. Why Timing Matters
6. Documents That Can Help
7. Frequently Asked Questions
8. Final Summary

Why Property Tax Arrears Matter to a Lender

Property tax debt is different from an ordinary unsecured bill.

Under the City of Toronto Act, 2006, Toronto property taxes are a special lien on the land and rank ahead of every claim, lien, privilege, or encumbrance except the Crown. The Municipal Act, 2001 provides similar priority for municipal taxes elsewhere in Ontario.

That priority is why lenders pay close attention to unpaid property taxes. In Toronto, the City notes that a tax and utility certificate shows the current status of a property's taxes and utilities and is often needed for mortgages, real estate transactions, or legal checks.

Property tax arrears affect the security behind the mortgage, not just your payment history.

Does owing property taxes mean an automatic decline?

No. A lender may consider why the arrears happened, how large the balance is, whether enough equity exists to clear it, and whether the borrower can manage the new mortgage.

A temporary cash-flow problem can be viewed differently from a file with several unresolved debts and little available equity.

 

Can Tax Arrears Be Paid Through a Refinance?

In some situations, yes.

If there is enough equity and the lender accepts the overall application, part of the refinance proceeds may be directed toward outstanding property taxes at closing.

A refinance might be structured to pay the existing mortgage, clear tax arrears, CRA tax debt, or consolidate other debts. This is not automatic; the lender still has to approve the mortgage amount, property, borrower, and use of funds.

Home equity can create options, but equity alone does not guarantee approval.

How much equity do you need?

There is no single percentage that applies to every lender or file.

The answer can depend on property type, location, appraised value, current mortgage balance, requested loan amount, income, credit history, tax balance, and lender category.

A useful first step is to calculate the realistic property value, total secured debt, tax arrears, and amount required to close.

 

What Lenders May Review

1. The Exact Tax Balance

Do not rely on an old bill if the account has remained unpaid.

In Toronto, late payment charges are added to past-due taxes at 1.25% on the first day of default and on the first day of each month afterward while amounts remain unpaid. Fees may also be added, and payments are applied to the oldest balance first.

2. Available Home Equity

The proposed mortgage must fit the existing secured debt, tax arrears, closing costs, and any other debts being paid.

3. Income and Payment Affordability

A lender may review employment or self-employed income, bank statements, tax documents, or other evidence depending on the mortgage type and lender.

4. Credit and Recent Payment History

Missed mortgage payments, high revolving debt, collections, and other credit issues can affect the file.

A difficult credit history does not always mean the file has no financing path.

5. The Stage of Municipal Collection

A recent overdue amount is different from a file that has moved deeper into collection.

Ontario's Municipal Act, 2001 and the City of Toronto Act, 2006 both contain procedures for registration of tax arrears certificates and the sale of land for tax arrears. Toronto also publishes current fees connected with its tax-arrears sale process.

The practical lesson is simple: dealing with the problem earlier can help prevent additional cost and urgency.

 

What If Your Bank Says No?

A bank decline does not necessarily mean refinancing is impossible.

Depending on the file, an Alternative Lending Solutions review or Private Mortgages option may assess the property, equity, repayment plan, and overall risk differently.

Private financing can sometimes help clear arrears and create time for a longer-term plan, but it can cost more than traditional bank financing. The exit strategy matters.

If the refinance would also combine credit cards, loans, or other balances, a broader Debt Consolidation review may be useful.

Can you refinance after your bank already said no?

Possibly. A second review may identify a different lender category, structure, or mortgage amount. It may also confirm that refinancing is not the right solution.

The key is to understand why the first lender declined instead of simply sending the same file elsewhere.

Why Timing Matters

Time matters because the tax balance can grow and the available options can narrow.

Toronto adds late payment charges to overdue property taxes and may add collection-related fees. The city also tells owners who cannot pay by the due date to contact Revenue Services about available payment-arrangement options.

If you are considering Mortgage Refinancing, reviewing the numbers early gives more time to gather documents, obtain an appraisal if required, compare lenders, and coordinate the payout.

Urgency should change the process, not eliminate proper review.

If your taxes are already in arrears, it may be worth having the file reviewed before making another financing decision. Sometimes a second opinion changes the structure; sometimes it confirms the safest next step.

 

Documents That Can Help

Depending on the lender and situation, useful documents may include:

• current mortgage statement;
• current property tax statement or tax certificate;
• any arrears or collection notice;
• recent property information or appraisal, if available;
• proof of income;
• recent bank statements;
• list of debts being paid through the refinance; and
• a short explanation of what caused the arrears.

Toronto tax and utility certificates provide current account-status information and are often used for mortgage and legal checks.

Strong files still need clear documentation and proper packaging.

 

Frequently Asked Questions

Can I refinance my mortgage if I owe property taxes?

Yes, refinancing may still be possible. Property tax arrears do not automatically disqualify a homeowner. The lender will usually review the amount owing, available equity, mortgage balance, income, credit profile, and why the taxes fell behind. Because municipal taxes have priority against the property in Ontario, a lender may require them to be cleared as part of closing. The exact structure depends on the lender and the complete application.

Can refinance money be used to pay the tax arrears?

Potentially, yes. If the approved mortgage amount is sufficient, part of the refinance proceeds may be directed toward the outstanding municipal tax balance at closing. This can leave the property taxes current after funding. However, the lender must approve the full transaction, including the loan amount and use of funds. Available equity, property value, income, other secured debts, and closing costs all affect whether this approach works.

Will unpaid property taxes stop a bank mortgage?

They can create a serious issue, but the outcome depends on the lender and the rest of the file. A bank may require the arrears to be cleared before funding or may decline if the overall application falls outside its underwriting rules. Another lender may consider a different structure. It is better to identify the exact tax balance and the lender's concern early than to assume every lender will respond the same way.

What happens if I keep leaving my property taxes unpaid?

The balance can increase through penalties, interest, and possible collection-related fees. In Toronto, late charges are currently added at 1.25% on the first day of default and on the first day of each month afterward while taxes remain unpaid. Ontario and Toronto legislation also provide enforcement procedures that can eventually lead to a tax sale process when statutory conditions are met.

Can a private mortgage help with property tax arrears?

A private mortgage may be an option when a traditional lender will not complete the refinance and there is sufficient property equity. Private lenders may assess the property, loan-to-value, and exit plan differently, but requirements vary. Costs can also be higher than conventional financing. The important question is not only whether private money is available, but whether the financing creates a realistic plan to clear the arrears and move toward a stronger long-term arrangement.

Should I refinance or make a payment arrangement with the municipality?

It depends on the size of the arrears, cash flow, mortgage balance, equity, and how quickly the taxes can be repaid. A municipal payment arrangement may be worth exploring if the balance is manageable without new borrowing. Toronto directs owners who cannot pay by the due date to contact the city about available arrangements. A refinance may make more sense when the tax arrears are part of a larger debt or cash-flow problem.

 

Final Summary

You may be able to refinance a property even when property taxes are in arrears, but the file needs careful structure.

A lender will want the exact tax balance, usable equity, property value, mortgage payout, income, credit position, and a clear plan for paying the arrears.

Because municipal property taxes have priority against the property, addressing the issue early can create more time to compare traditional, alternative, or private financing options and decide whether refinancing is actually the right solution.

Every situation is different, and the best outcome depends on both the financing structure and the plan after closing.

 

About Hensey Financial

Hensey Financial helps homeowners, self-employed borrowers, real estate investors, and business owners throughout Toronto, the GTA, and Ontario explore mortgage and financing solutions suited to their circumstances.

Whether someone is purchasing a property, refinancing a mortgage, consolidating debt, managing an urgent closing, accessing home equity, or reviewing alternative financing options, Hensey Financial provides practical guidance and gives homeowners the option to have their mortgage file reviewed based on their individual situation.

 647-350-6641
 www.henseyfinancial.ca

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