(Adds details, background, market reaction, comment from trader...

(Adds details, background, market reaction, comment from trader and economist)

WELLINGTON, July 19 (Reuters) - New Zealand's central bank on Tuesday presented proposed changes to existing mortgage lending rules in order to mitigate risks to financial stability arising from the current boom in house prices.

"The Reserve Bank considers a sharp correction in house prices to be a key risk to the financial system, and one that is increasing," it said in the consultation paper.

The New Zealand dollar fell to 0.7057 on the statement as it increases the chances of a rate cut on Aug. 11, said Stuart Ive, Foreign Exchange and Derivatives senior client advisor for OM Financial Ltd.

New Zealand's official cash rate is currently at a record low 2.25 percent. Prior to Tuesday, economists said the chances of a rate cut in August were high but the hot housing market could stay the central bank's hand.

However, the "announcement of new house lending restrictions reinforces the likelihood of the RBNZ cutting in August, given the very tight timeline proposed for implementing the added restrictions," said ASB Bank Chief Economist Nick Tuffley.

The proposed new restrictions would take effect on Sept. 1. The consultation will conclude Aug. 10, the bank said

New Zealand house prices have increased by around 50 percent since 2010, driven by strong immigration, low mortgage rates and sluggish housing supply.

The central bank put in place temporary restrictions on high loan-to-value ratio bank lending in October 2013 and tightened those restrictions for investors in the nation's largest city of Auckland in November last year.

However, "growth in house prices and credit have remained elevated," it said Tuesday.

Under the proposed new restrictions no more than 5 percent of bank lending to residential property investors across New Zealand would be permitted to borrowers who have a deposit of less than 40 percent.

No more than 10 percent of lending to owner-occupiers across New Zealand would be permitted to borrowers who have a deposit of less than 20 percent.

Loans that are exempt from the existing LVR restrictions, including loans to construct new dwellings, would continue to be exempt, the central bank said.

The central bank also said it is progressing its work on potential limits to high debt-to-income ratio lending, which would be a potential complement to LVR restrictions.

“We have had positive initial discussions with the Minister of Finance on amending the Memorandum of Understanding on Macro-prudential policy to include this instrument," Reserve Bank of New Zealand Governor Graeme Wheeler said.