How much can you save?

How much can you put towards your mortgage or savings when you really put your mind to it? The mortgage industry has developed good yardsticks that can help you figure that out. With a few adjustments, these measures show that most people with at least average incomes should be able to comfortably set aside about 20% of their income. If you’re willing to be more frugal, you can probably manage about 25%.

Of course, the industry has developed these ratios to assess your ability to carry a mortgage: they’re not concerned about your ability to save. But if you adopt a strategy where a fixed percentage of your income goes to either the mortgage or savings, then the difference doesn’t matter.

The most important ratio goes by the arcane title of gross debt service (GDS) ratio. It measures mortgage payments plus property taxes and heating costs in relation to your gross (pre-tax) income. Most lenders will allow you to take on a mortgage with a GDS ratio up to 32%. But that will likely stretch your finances to the limit: many borrowers prefer to go up to only 27% or 28%. That leaves a little bit more room for other costs like raising kids, saving for university costs, or just a more comfortable lifestyle.

The part of the GDS ratio taken up by property taxes and heating can vary quite a bit, but a rule of thumb is 7%. So if you strip those factors out of the ratio, the proportion of your income that you can apply just to the mortgage is around 25% if you want to stretch a bit, or 20% if you want to keep the load more comfortable.

This is all money that you can convert to savings after your mortgage is gone. After all, you showed you could manage it when paying off your home, so you should be able to do just as well when you’re paying yourself.

Another industry yardstick called the total debt service (TDS) ratio includes other forms of debt payments, like personal loans and car leases. Most lenders allow you to have a TDS ratio up to 40%. But even if you don’t take on debt for cars and other consumer purchases, you will need to earmark part of your income to save for those things. So most people shouldn’t figure on tapping any of this capacity for retirement savings. However, in special circumstances—one example is a couple in their 50s with no debt whose kids are financially self-sufficient and who only buy a small, reliable car once every 10 years—then you can probably push your savings rate quite a bit above 25%. But most people probably shouldn’t count on it.

There’s a bonus here once you start applying the money to savings instead of your home loan. Mortgage payments don’t enjoy tax breaks, but RRSP contributions will get you a juicy tax rebate. (Granted, you have to pay tax on this money when you withdraw it in retirement.) Your effective savings can also be quite a bit higher if you salt away the rebate as well, particularly if you’re in a high tax bracket.

If you’re a frugal, mortgage-free Canadian with an average income or higher who has paid off your mortgage and other debts, and you’re willing to salt away your RRSP rebates, then chances are you can save a total of 30% to 40% of your income.