A further economic downturn could see repossessions and arrears almost double, rising above 2009 levels, S&P suggested.
Even its third, optimistic scenario, where the economic recovery picks up, showed that arrears and repossessions could increase, due to higher interest rates.
Mark Boyce, credit analyst at S&P, said: “Under the baseline scenario of a slow economic recovery and eventual interest rate rises over the next two to three years, we believe the proportion of UK mortgage borrowers in severe arrears could rise by more than a fifth.”
Mortgage arrears and repossessions have shown a modest decline since mid-2009.
However, S&P highlighted that commentators have questioned whether record low interest rates are keeping arrears artificially low.
Boyce: “Rate rises seemed imminent in the first half of 2011, raising concerns that some borrowers might start struggling to make their mortgage payments.
“More recently, however, mounting evidence of stagnation in the UK economy has turned the spotlight away from rising interest rates and onto the possibility of a double-dip recession, which would likely bring higher unemployment and renewed weakness in house prices.”
