Competitive by nature, with Toronto being the most competitive market in Canada, increasing home prices, often changing interest rates, and inflexible lending criteria strongly influence mortgage approval factors. This article examines these factors and their impact on a potential homebuyer's financing decision.

High Home Prices and Down Payment Requirements

It's difficult to be approved for a mortgage due to the fact that there is a minimum down payment of 5% on houses whose valuation does not exceed $500,000, 10% from $500,000 to $1,000,000, and 20% for over $1,000,000. This demand, hence, plays into the wheel for most purchasers since even strong, creditworthy buyers cannot succeed in meeting these demands due to insufficient savings. The City's mortgage rules are considered one of the driving forces for mortgage approval in Toronto.

Stress Test and Borrowing Power

Approvals for Toronto mortgages are based on a federal government mortgage stress test to ensure that borrowers can afford a mortgage when the interest rates go up. The test takes the benchmark rate of the Bank of Canada or the contract rate plus 2% against payment management. This can be a problem in centres like Toronto that have seen major appreciation in home prices, as buyers must qualify for a mortgage at a rate higher than they actually may pay, which could rule out some buyers altogether.

Interest Rates and Affordability

Most mortgages heavily rely on interest rates, especially in the Toronto housing market. While low rates made it economical for borrowers, buyers could afford high mortgage payments. On the contrary, when rates increase, they inflate the monthly mortgage costs, hence leading to strict lending criteria. This sometimes means that lenders may ask for more documentation to prove a borrower will be able to bear the additional financial burden. Even small increases create less affordability of housing in Toronto.

Income and Debt Levels

Meanwhile, Toronto's housing market is raising red flags due to the levels of debt, as most homebuyers resemble squeezed buyers. Lenders in Toronto commonly review the GDS and TDS ratio for a borrower; these refer to the percentage of income that the individual incurs in terms of housing costs and overall debt. This perhaps means that lenders will be much more careful with mortgage approval for buyers because of heavy debt loads and increased home prices since even smaller increases in interest rates would stress their finances.

Market Competition and Pre-Approvals

The Toronto housing market is competitive; hence, most buyers get pre-approved for a mortgage before they go house hunting. A pre-approval will give an approximation of how much a person will be able to borrow, the interest rate, and can 'lock in' that rate for a certain period, usually between sixty to ninety days. It does not, however, guarantee approval. The market conditions may be different from when the buyer had obtained the pre-approval because of changes in interest rates or new mortgage rules, for example. At this point, after an offer is made, lenders must undertake a more serious evaluation of the property and the overall financial position of the borrower. This may bring with it some complications, especially in a hot real estate market.

Volatility of Housing Supply and Price 

The volatility, brought about by the limited supply of homes, makes mortgage approval in Toronto complicated. Fast appreciations in property values could force would-be buyers to increase their down payments or try to get larger mortgages, which may complicate the process of getting approval. In fast-appreciating markets, lenders are more cautious; hence, they will review applications with greater scrutiny to reduce their risk. If the property values are unsustainable, they could easily limit the loan amounts, thus making access to mortgages more restrictive. 

The Toronto housing market poses tremendous difficulties due to its high prices, high demands for down payments, federal stress tests, and now rises in interest. All this gives potential homeowners a heads-up on these factors so that they can, therefore, make prudent decisions that may promote their chances of securing a mortgage in Canada's competitive house market.