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S&P predicts 20% arrears increase even if economy recovers

Arrears levels could increase by more than a fifth even if the economy slowly recovers and interest rates rise gradually, according to Standard & Poor’s.

But if the economy takes a turn for the worst and returns to recession, arrears and repossession levels could double, the ratings agency claims.

The forecasts were made in a scenario analysis report which looks at three economic scenarios: baseline, pessimistic and optimistic.

Mark Boyce, credit analyst at Standard & Poor’s, says: “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.”

He says that in the pessimistic scenario, which assumed a renewed economic downturn, arrears and repossession rates could almost double, surpassing their 2009 peak.

Boyce adds: “But even in an optimistic scenario – where the economic recovery picks up – we found that arrears and repossession rates could increase due to higher interest rates.”

He says that recently, the spotlight has been turned away rising interest rates due to growing evidence of the stagnation of the economy, and on to the possibility of a double-dip recession.

He says this would most likely bring higher unemployment and renewed weakness in house prices.

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