Borrowers are facing a mortgage 'fiscal cliff'

If inflation predictions are met over the next five years, borrowers could end up with as little as £56 in disposable income each month, a new report warns.

The Mortgage Fiscal Cliff research by analysts Acenden predicts that if inflation averages at 2.5 per cent in the next half-decade households could see an 82 per cent drop in the cash they have available after repaying their mortgage and other regular demands.

The future's still pretty bleak for borrowers. If inflation averages at a lower forecast rate of 1.8 per cent, it would mean borrowers will still experience a significant 42 per cent drop in spending money, with only £130 left per month. The research also forecasts how a rise in interest rates alone, without any increase in inflation or wages, would have a similarly negative impact.

An increase of just 2 per cent to interest rates would cut monthly affordability by £184 to just £126.

Alex Maddox of Acenden warned: "If we see higher inflation and interest rates without wages growing then we will start to see a deeper and worrying problem. Given the realistic possibility of price inflation remaining above interest rates and wage growth, there will be inevitable impacts on monthly affordability for borrowers."

However, if the economy recovers and wages rise, that would have a huge positive impact. If salaries climbed 2.5 per cent over the next five years, Acenden forecasts monthly affordability would increase by £609.