By Myles Neligan

LONDON (Reuters) - Royal Bank of Scotland on Monday said it would not repossess the homes of mortgage customers who default until six months after they first fall into arrears.

RBS, owner of NatWest bank, said the move was designed to give overstretched borrowers a chance to resolve their financial problems as falling house prices and a flagging economy put households under pressure.

"We fully understand that one of the biggest worries facing homeowners in financial difficulty is the thought of losing their home, and this is especially true given the current economic climate," RBS Managing Director of Retail Banking Craig Donaldson said in a statement.

The country's biggest mortgage lenders have already committed to waiting three months before repossessing customers' homes, under an agreement announced by Chancellor Alistair Darling last week.

Mortgage arrears and repossessions have risen sharply this year, reflecting the economic slowdown as well as a sharp rise in borrowing costs in the wake of the credit crunch.

The Council of Mortgage Lenders said there were 168,000 households in arrears at end-September, up 8 percent from end-June.

A total 11,300 homes were repossessed in the three months to September 30, an increase of 12 percent on the previous quarter.

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