The UK economy is growing faster than expected and this could push forward the first base rate hike by as much as 12 months, economic forecasters say.
Borrowers considering taking out a five-year fixed rate should act sooner rather than later, because rates are likely to start creeping up as anticipation of a rate hike grows, brokers have warned.
There is a one in five chance that unemployment could fall to 7% in the first half of next year, which is one of Bank of England governor Mark Carney's trigger points for hiking base rates from today's 0.5%, according to the National Institute of Economic and Social Research.
But it admits there is "considerable uncertainty" about the rate at which unemployment will fall. Its best guess is that the level could get 7.4% by the middle of next year, down from today's 7.7%.
But it could fall much faster than that. "While our central forecast is that unemployment will not drop below 7% until 2016, we estimate a 20% chance that it will fall below that level as early as the first quarter of 2014.
"Our forecast assumes a rise in interest rates in the second half of 2015."
That is nevertheless one year earlier than Mr Carney's original projections suggested.
The Institute also revised its growth forecast upwards, predicted that the UK economy will grow 1.4% this year and 2% in 2014, with consumer price inflation falling slightly to an average of 2.5% next year.
New figures also published yesterday showed the all-important services sector is booming faster than expected.
The Markit/CIPS purchase manager’s index hit 62.5 in October, the fastest rise in activity since May 1997.
This suggests UK GDP could grow by 1.3% in the final quarter of 2013, far higher than Q3's figure of 0.8%.
Borrowers should take advantage of today's all-time low mortgage rates to consider fixing for periods of up to five years, said Henry Knight, managing director of Springtide Capital.
Rates could start creeping up in anticipation of an earlier hike in the base rate. "Long-term fixed rate products will always increase slightly quicker than two-year deals.
"For example, five-year fixed rates have started to increase in price as of last month whereas two-year deals are still at their lowest. However, it won’t be long before these rates also begin to creep up in price.
"There is an argument for taking a cheap two year fixed rate product now and taking a gamble on a new two-year fix at the end of the term, yet this is a risky strategy in my view.
"For those who are looking for certainty and peace of mind, we would argue that five-year fixed deals are still currently providing good value for money and offer a less risky option for those who are looking for security against rising interest rates.”
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