The number of mortgage applications has not declined yet despite interest rates rising to the highest level in 15 years, Nationwide has said.

However, the building society said the sharp increase in borrowing costs was likely to cause a “significant drag” on activity in the housing market.

Nationwide’s latest data revealed house prices dropped 3.5% in the year to June, the largest fall since 2009.

The Bank of England has raised interest rates in an attempt to slow inflation.

The Bank’s base rate, which usually dictates the borrowing costs of lenders, is at 5%.

Rob Gardner, Nationwide’s chief economist, told the BBC’s Today programme that mortgage repayments were now taking up almost 40% of people’s average take home pay compared to 30% previously.

However, although the cost of borrowing money over longer terms had risen, it had “yet to have the same negative impact on sentiment”, Mr Gardner said in Nationwide’s latest report.

“For example, the number of mortgage applications has not yet declined and indicators of consumer confidence have continued to improve, though they remain below long run averages.”

Figures from the Bank of England showed that despite higher rates for mortgage deals, approvals increased from 49,000 in April to 50,500 in May. Approvals for remortgaging also saw a rise from 32,500 to 33,600 during the same period.

The impact of higher interest rates on mortgage holders is more gradual compared to previous times, as the majority of homeowners are on fixed-rate deals. Only 15% of mortgage holders are on deals linked to variable rates – compared to 70% 20 years ago.

Mr Gardner said 85% of the stock of outstanding mortgages were fixed, but warned 400,000 fixed-rate borrowers would be refinancing every three months.

With mortgage rates hitting 6% for a two-year deal, Mr Gardner said a typical monthly payment would rise by £385.

“Clearly this represents a significant increase, but those borrowers were stress-tested at interest rates above those now prevailing in the market to ensure they could cope with such an increase,” he said.

Mr Gardner said providing the jobs market and interest rates perform “broadly as expected”, the UK was “unlikely to see the waves of forced selling which would probably be required to result in a more disorderly adjustment to the housing market”.

However, Sarah Coles, head of personal finance at Hargreaves Lansdown, said remortgagers “face potentially disastrous rises in their monthly payments”.

“The new rules will mean people can make a temporary change to their mortgage to get them through the next six months, but there will be those who can’t see any light at the end of the tunnel, and sell up,” she said.

But Ms Coles said there was “still hope” that inflation could ease and then mortgage rates would fall.

Nationwide said all regions, except from Northern Ireland, saw annual house prices fall. London saw a 4.3% year-on-year decline, while the North West saw prices down 4.1% year-on-year.

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