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If I have a home mortgage and have only paid off 20% of the principal, then the bank technically "owns" the remaining 80% of the home. So, why isn't the bank required to pay 80% of the property tax every year?

user3163495
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    What would be the point? If if for some reason the bank was responsible for some % of the tax, do you think they wouldn't just pass it on to you by adding it to your mortgage payment? – brhans Jul 17 '18 at 18:49
  • @brhans what if the mortgage amount was $200,000, but the property tax was $10,000/year (because it's a nice waterfront area or something)? Over 30 years (assuming the tax rate doesn't change), that's $300,000 you've paid in taxes...if the bank were to incorporate that into the plan, that's like an 11% interest rate – user3163495 Jul 17 '18 at 19:00
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    The bank probably already rolls the various insurances (homeowners, PMI/MIP) into your payment on top of the actual mortgage amount - this would be no different and has nothing to do with the interest you're paying on the principal you borrowed. But DJClayworth's answer tells you the real story. – brhans Jul 17 '18 at 19:06
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    @brhans, in fact, don't most lenders do that with property tax? – PersonX Jul 17 '18 at 19:59
  • @PersonX - good point - yes. – brhans Jul 17 '18 at 20:01
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    This is a fair question. OP is just under a common misunderstanding. Not sure why it is being down voted. – JohnFx Jul 17 '18 at 21:20
  • In USA, it is typical for the bank to pay the taxes, but the contract says that they do it from an Escrow account that the buyer must keep funded as a portion of the monthly payment. – WGroleau Jul 18 '18 at 15:55
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    Related: Am I considered in debt if I pay a mortgage? – Ben Miller Jul 18 '18 at 16:18
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    As a curiosity for overseas readers, it's perhaps worth noting that in the US experience, in almost all regions, almost all of the property tax goes to pay for the local school system. – Fattie Jul 18 '18 at 19:21
  • Do they get to use 80% of the house? – David Schwartz Jul 18 '18 at 22:28
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    I think the actual question OP has in mind is that a "property" tax should be a tax on net "property"/assets (wealth tax). Most property taxes are in that sense actually a misnomer because they are usually just a real estate tax. – HRSE Jul 19 '18 at 01:24
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    The question is based on a completely incorrect premise; it is not in any way true that "the bank technically owns 80% of the house" for a standard mortgage. If your question is about mortgages constructed to get around the prohibition in Islam about paying interest, then state the question more clearly. As it is, this question should be closed as it is based on a faulty premise. – Eric Lippert Jul 19 '18 at 22:30
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    Comments are not for extended discussion; this conversation has been moved to chat. – GS - Apologise to Monica Jul 22 '18 at 11:44

3 Answers3

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You have a misunderstanding of what a mortgage means.

The bank does not own 80% of your home. Instead they have lent you some amount of money, and they have a lien which means they can possess your home if you fail to pay it back. They are not responsible for any costs of your home.

I know people popularly say "the bank owns 80% of my home" but it is not true in any technical or financial sense.

(There are some exceptions for unusual kinds of 'mortgages')

DJClayworth
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Slight addendum to the already posted correct answer:

The institution who lent you the money has no reason to pay the property tax on your building. They aren't using water, taking showers, flushing toilets, getting police and fire protection, driving on city streets, etc...

However, they do have a profound interest in ensuring that you pay the property tax.

As explained, if you should default on your payments, the mortgage holder can take the house, sell it, and take what is owed from the proceeds.

EDITED to address comments:

But, if you have run up an unpaid property tax bill before defaulting, the local authority gets first crack at the value in the property to pay the tax bill, ahead of the mortgage company. This in turn reduces the amount available to the mortgage company to satisfy the mortgage in default.

No lender likes to see their available collateral diminish in value, so they will either demand an annual receipt showing taxes paid, or add the property tax to the mortgage payments you are making.

For the same reason, one often needs to supply the mortgage company with proof of adequate fire/flood/tornado/earthquake/whatever insurance...

And if one borrows more money with the property as collateral, the terms first and second mortgage denote not chronological order, but rather the order in which the lenders, upon default, can get their balance owed from the sale (until it runs out).

When I sold my home (Toronto, Canada) I took back a mortgage from the purchaser, that, among other things, allowed me to inspect the mortgaged property (with reasonable notice) to ensure that the property, that I no longer owned, was being maintained so as to preserve its value.

DJohnM
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    +1 for this key statement: "However, they do have a profound interest in ensuring that you pay the property tax." – GWR Jul 18 '18 at 11:35
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    Down voted. When I had a mortgage, I did not do escrow, and the lender never asked me for a property tax or insurance (for that matter) payment receipt. Also you are technically incorrect that the property taxes are added to mortgage payments. Payments to escrow and payments to the mortgage are two distinct transactions that are covered by one "check". – Pete B. Jul 18 '18 at 14:07
  • This answer may be specific to some jurisdictions, but the question is universal. – Qsigma Jul 18 '18 at 15:22
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    @PeteB. You may not have, but it is very common to (pretty uncommon not to) have an escrow account, even if you might be able to get out of it later. It's almost universally true that lenders will require proof of sufficient insurance. And while it is true that the money is going into two different buckets after the fact if you have an escrow account, it is still coming out of a single payment, and your mandatory monthly bill is just listed as the sum of the two, so while it might technically be two accounts, the payment of both is certainly still a single "transaction". – neminem Jul 18 '18 at 15:28
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    @neminem All of this is definitely jurisdiction-specific. I am in the process of purchasing a property in the UK, and have no idea what the escrow account being discussed even means. But then, there isn't a direct equivalent of the property tax being discussed either. I think it's a common problem on this site that people assume things are universal because they have only ever lived in a single jurisdiction. – IMSoP Jul 18 '18 at 17:35
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    I don't want to just willy-nilly edit people's answers, but I would suggest changing the second to last paragraph to something like "No lender likes to take the risk of getting back less than they are owed, so often they will require you pay them and they pay the taxes on your behalf. If they do let you pay it directly, they may charge a higher interest rate for the extra risk; some even demand an annual receipt showing taxes paid." – stannius Jul 18 '18 at 17:52
  • That clarifies two things I don't agree with in the paragraph: unpaid taxes don't diminish the house value (deferred maintenance would, but does any lender actually check on that?). And not all lenders demand proof of payment. – stannius Jul 18 '18 at 17:53
  • The question explicitly asks about mortgages and property taxes. Why is anyone assuming that it applies to all jurisdictions when it clearly only applies to places which have bank mortgages and property taxes? – barbecue Jul 18 '18 at 20:10
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    @barbecue I'm not sure as many people are assuming that as you think. IMSoP is wrong to say that the UK doesn't have a property tax (council tax is called a tax, goes to the local authority, and is pro rata the assessed value of your property, within bands) but right to imply that it's not secured against a lien on the house. That last concept is, in my experience, very US-specific. So it is possible to have cogent objections to the assertion that the lender has an interest in your paying these taxes, without totally leaving the premiss. – MadHatter Jul 19 '18 at 06:23
  • @stannius If a hypothetical house would normally sell for 50,000$, and has 10,000$ in unpaid property taxes, the bank will only get 40,000$ back if they have to repossess the house. Considering that the only value the house has to the bank is to sell it, that seems like a very direct reduction to the house's practical value from the bank's perspective. (This assumes the house is in a jurisdiction where the bank will lose the house if the taxes remain unpaid, which I think is true of most of the United States) – Patrick M Jul 19 '18 at 10:44
  • @PatrickM just like a mortgage doesn't really mean the bank owns 80% of your house, unpaid taxes don't really diminish the value of the house. What they do is reduce the amount of money that would be available in a foreclosure. – stannius Jul 19 '18 at 16:23
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    Comments are not for extended discussion; this conversation has been moved to chat. – GS - Apologise to Monica Jul 22 '18 at 11:48
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Ditto DJClayworth.

As long as you make your mortgage payments, the bank has zero property rights in your house.

The bank cannot evict you from the house.

People from the bank cannot enter the house without your permission. They certainly cannot just decide to move in one day.

The bank has no say in what furniture you put in the house, what color you paint it, or what sort of trees and flowers you plant.

Etc.

Yes, if you fail to pay the mortgage, the bank can bring legal action against you to force you to pay, including ultimately the right to sell the house to collect what you owe them.

But then, if you take your car to an auto mechanic and then refuse to pay the bill, the mechanic has a similar right to sell your car to pay the bill. Does taking your car to an auto mechanic mean that now the mechanic owns the car? No, not unless you don't pay the bill.

Suppose you buy a toaster with a credit card. Who owns the toaster, you or the credit card company? You do, of course. Even though you haven't paid for it until you pay the credit card bill.

I had surgery a few months ago and the doctor put stents in my heart. I haven't paid most of my share of the bill yet. Does the hospital own my heart? No. (My girlfriend does. :-) )

Jay
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    +1 For a good answer, especially the heart ownership comment. – dgnuff Jul 19 '18 at 20:40
  • I think they would have rights if you took actions that reduce the value of the house. Say you have $100,000 worth of fire damage, and the insurance pays. If you are happy to live with the damage and take the $100,000 for the best holiay ever, the bank won't be happy. – gnasher729 Jul 21 '18 at 18:33
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    @gnasher729 Hmm, anything like that would have to be in the mortgage contract. I just glanced through my mortgage and didn't see anything like that. "they wouldn't be happy" and "they would have legal power to force you to do something different" aren't the same thing. My mortgage does require me to have insurance on the property. I didn't check my insurance policy, but I vaguely recall it having a clause about me being required to keep the property in "good repair" or some such. – Jay Jul 22 '18 at 03:40
  • @Jay So indeed you vaguely recall the bank having power over the house. – Anonymous Coward Jul 22 '18 at 06:02
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    They don't have power over the house. You have a contract where they loaned you a lot of money, and you gave them a security that the bank can use to recover their money if you don't pay. The contract will have consequences if the value of the security gets reduced. – gnasher729 Jul 22 '18 at 22:28
  • @Jay, my (US) mortgage does have a clause that requires funds from insurance claims to be used towards repairs. – Charles Duffy Jul 23 '18 at 02:23
  • @JoseAntonioDuraOlmos I said my insurance, not my mortgage, but regardless. "I have certain contractual obligations to the bank" is not at all the same as "the bank owns my house". I suppose theoretically contractual obligations could be so extensive that they are hard to distinguish from ownership, but in this case they are nowhere close. As long as I make my mortgage payments, the bank cannot evict me from the house. Bank officers cannot move in to the house or decide to hold a party here without my permission. They cannot tell me what color to paint it or how to decorate it. ... – Jay Jul 23 '18 at 19:17
  • ... The only power they have is that if I don't pay back the money I owe them, they can sell the house to get their money, and they have some very limited ability to prevent me from reducing the value of this collateral. Like any loan, if you don't pay them back, they can get the courts to seize your property and sell it so they get their money. They don't own anything of yours unless you don't pay the loan. I don't know why you want to exaggerate an obligation to replay money you borrowed to "they own my house". – Jay Jul 23 '18 at 19:22