It's official: Labor's housing dream for first home buyers is at risk of becoming a debt trap nightmare. 

The RBA increased the cash rate by 25 basis points to 4.35 per cent on Tuesday, which turns the financial screws some more on a growing - and very vulnerable - group of young Australians.

At the last election, the Albanese government sold its expanded five per cent deposit scheme as a compassionate and aspirational measure. 

It would bring the great Australian dream within reach for those who previously couldn't make it happen.

But it is now becoming increasingly clear that pushing marginal buyers into an inflated market with wafer thin equity, in a rising interest rate environment, during a cost of living squeeze, is very risky business indeed. 

Even riskier today, after Michele Bullock hiked the cash rate to 4.35 per cent. 

The early warning signs of what some investors have dubbed as potentially the 'mother of all' mortgage default cycles are already there. 

Equifax data shows 0.78 per cent of new home loan holders were 30 days in arrears in February, double the 0.39 per cent recorded among earlier buyers. That's not a crisis yet, but it is a clear signal that the newest borrowers are already more exposed.

It is the contradiction at the heart of Labor's flagship housing policy. Labor says it wants to help young Australians into the market. 

What it's actually doing is helping them into maximum leverage.

That's a deeply dangerous position to be in, at a time where it's entirely conceivable they end up with negative equity and loan repayments they can no longer afford. 

And that's even if they keep their jobs, in these increasingly uncertain economic times. 

Inflation remains sticky and the expectation is that it will force rates higher and higher in the months ahead. 

And at the very moment monetary policy is making debt more expensive, the federal government is encouraging first home buyers to take on more of it. 

Under the Labor scheme, first-home buyers can purchase with deposits as low as 5 per cent. Eligible single parents can do so with just 2 per cent. 

The government guarantee helps buyers avoid lenders' mortgage insurance (LMI), which in turn puts the risk of defaults back onto taxpayers. 

Places within the scheme have been uncapped, income caps have been removed and property price caps have also been lifted.

The irony is that a scheme designed to make housing more affordable has helped push up the price of homes under the qualifying caps. That is what demand-side subsidies do in a supply constrained market: they give buyers more capacity to pay, and prices then adjust accordingly.

This is no longer a tightly targeted support measure. It is a demand-side accelerant at a time when defaults are expected to start rising.

However, in the current climate it's not out of the question that a hard correction is on the horizon for home owners and investors alike. 

The risk is amplified if the second interest rate hiking cycle some economists now warn about keeps building. 

If the cash rate pushes towards 5 per cent or beyond, for example, the borrowers most exposed won't be the ones sitting on years of equity. 

It will be the recent entrants who bought at stretched prices with very little margin for error.

That is the brutal arithmetic of high leverage. A buyer with only 5 per cent equity does not need a housing collapse to be in trouble. 

A modest price fall, transaction costs and a forced sale can be enough to leave them unable to exit the mortgage without carrying debt with them.

And refinancing may not offer much of an escape hatch. 

Recent first home buyers who owe more than 80 per cent of their property's value can find themselves facing lenders' mortgage insurance if they try to switch lenders, wiping out the savings from chasing a lower rate. That leaves them more exposed to whatever rate their existing lender offers.

Those who take up the scheme will be homeowners in name, but highly exposed debtors in substance. 

Labor says it's helping Australians buy homes sooner, but buying sooner is no longer buying safely.

Encouraging young households to stretch themselves into an overheated market just as the central bank is lifting the cost of servicing the debt required to get there is nothing short of dangerous. 

Throw in whatever pushing investors out of the housing market (with capital gains tax hikes and cuts to negative gearing) might do to it, and uncertainty is everywhere.

Australia's next cycle of mortgage defaults is unlikely to begin with a spectacular bank collapse. 

The banks are well capitalised and the mortgage books still look broadly sound. 

But default cycles don't need drama to do real damage. Sometimes they arrive quietly, one refinancing failure at a time.

Late stage arrears are already moving in the wrong direction, especially for larger loans. 

Equifax data shows home loans more than 90 days overdue have increased by 8.9 per cent nationally for loans above $750,000 compared with the same time last year.

That is exactly where many first home buyers in capital city markets now find themselves: with large loans, thin equity and little room to manoeuvre.

Labor wants to be seen as the party of home ownership. 

But unless it's careful, it risks becoming the party that helped first home buyers into the market just in time for rising interest bills and financial heartache.