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Thursday’s increase to the Bank of England base rate is expected to have a limited impact on borrowers but could hit home movers’ confidence.

The latest interest rate rise is likely to slow the housing market but should have only a limited impact on mortgage customers.

The Bank of England’s Monetary Policy Committee voted to increase the base rate to 0.75%, the second rise since November and the highest level it has been at for nearly a decade.

But the impact on mortgage rates has so far been muted, with just a handful of lenders announcing changes to their variable or fixed rate deals.

If lenders do pass on the increase in full, a 0.25% rise will add only around £25 a month to a £200,000 mortgage.

Even so, the hike is expected to act as a further brake on housing market activity.

Jeremy Leaf, former RICS residential chairman, said: “It’s not the relatively modest increase in interest rates which is significant – the message it sends about their future direction is far more important.

“The change is likely to compromise already fragile confidence to take on debt in the property market and wider economy.”

Why is this happening?

When interest rates rose in November, lenders took up to a month to announce they were passing it on to their customers, although despite the delay, the majority raised their standard variable and tracker products by the full 0.25%.

For new fixed rate customers, the latest increase was widely anticipated and had already been factored into swap rates, upon fixed rate deals are based.

Financial information group Moneyfacts also pointed out that many lenders also raised their rates in the run up to May’s MPC meeting, when the bank rate was expected to be increased but was not.

A further 28 lenders increased the cost of their products in July, with some hiking them twice.

As a result, the average cost of a two-year fixed rate deal has already increased from 2.33% in November to 2.53% today.

Who does it affect?

Around 35% of mortgage customers are currently on variable rate loans and will most likely see the cost of their deal rise in line with the base rate increase.

Fixed rate customers will not see an impact until their current deal comes to an end and they have to remortgage.

Even so, Moneyfacts points out that at 2.53% the average two-year fix is still significantly lower than the 4.88% it stood at in February 2009, when interest rates were last more than 0.5%.

It added that longer-term fixed rate mortgages were becoming increasingly popular with borrowers in the face of future interest rate rises.

At an average of 2.93%, the typical five-year fixed rate loan is currently just 0.05% higher than it was in November due to growing competition in this space.

What’s the background?

Despite the latest rate rise being expected to have only a limited impact on borrowers, it is still expected to slow the housing market.

The prospect of future hikes is likely to hit confidence among potential buyers, while higher borrowing costs will contribute to already stretched affordability.

Ed Stansfield of Capital Economics said: “Rising rates will only reduce access to mortgage credit, keeping sales subdued and ensuring that house prices do little more than tread water.”

But he added that with the economy doing well, and the Bank Rate expected to rise only gradually, the risk of a house price correction was small.

Top 3 takeaways

• The latest interest rate rise is likely to slow the housing market but should have only a limited impact on mortgage customers
• The Bank of England’s Monetary Policy Committee voted to increase the Base Rate to 0.75%, the second rise since November and the highest level it has been at for nearly a decade
• If lenders pass on the increase in full, a 0.25% rise will only add around £25 a month to a £200,000 mortgage