Struggling mortgage holders could have up to a third of their monthly repayments 'frozen' for a period of five years under plans set to be recommended to the Government.

The new deal would apply to those in severe difficulty including the unemployed and those who have seen their income drop significantly.

Strict criteria would apply and only those who are deemed to have a good chance of getting back on their feet will qualify for the scheme.

Under the proposal, a householder with a mortgage of, say, €300,000 would be able to park €100,000 for up to five years without interest accruing.

The recommendations are being made by a Government-appointed group which was tasked with reviewing banks' arrangements for mortgage arrears and personal debt.

The scheme would be subsidised by the Government, which would pay banks who participate 10 cents for every euro 'parked'.

Reports about the new code on mortgage arrears come as the Financial Regulator, Matthew Elderfield, warned that the level of mortgage arrears is likely to get worse.

"My guess is that, over time, they are going to get worse rather than improve because of the unemployment levels. But the banks, I think, are taking a responsible, reasonable approach of forbearance by allowing customers to reschedule," Mr Elderfield told the Chairperson's Forum at the Institute of Public Affairs in Dublin.

"It's something we will watch very closely in the course of the next year."

The Financial Regulator has a separate, concurrent, review on the banks code of practice on mortgage arrears.

At the moment the regulator's rules bar banks or building societies from seeking repossession until 12 months after a home owner has defaulted on a mortgage payment.

Under the proposed new rules, if home-owners agree to a new repayment arrangement, the 12-month period would start only when they fall into arrears on their renegotiated deal.

Debt expert Frank Conway said if the recommendations were as reported they were "disappointing".

"The problem is that often the most pressure for people is coming from unsecured creditors. I have seen plenty of cases where the monthly repayments on the mortgage are only a fraction of the total owed.

"By and large mortgage companies have been bending over backwards to accommodate customers, but it is the other debt from credit cards and other bills that are destabilising household budgets," said Mr Conway, a director of debt advice group,

Professor Morgan Kelly, economist at UCD, has said at least 100,000 mortgages were already 'under water' and suggested it would not be a surprise if mortgage arrears numbers went to 200,000.

At the moment, 35,000 home-owners are officially in arrears. The financial regulator has been told that there has been a 50% rise in the number of home-owners who have renegotiated their mortgage.