UAE residents warned against using credit cards for property deposits

Buyers cautioned over high interest rates, while Indian investors could face regulatory challenges

First-time buyers usually use credit cards to buy off-plan properties with lower initial commitments. Chris Whiteoak/ The National

Using a credit card to cover part of a property down payment in the UAE is quite common but comes with risks, experts warn.

The issue is in focus after Indian property buyers in Dubai reportedly faced regulatory challenges back home after using international credit cards to make down payments during their UAE visits.

“It is a relatively common practice in Dubai to use credit cards for partial down payments, particularly among buyers purchasing directly from developers,” says Farooq Syed, chief executive of Springfield Properties.

“Most developers allow a portion of the initial deposit – typically between Dh40,000 [$10,890] and Dh100,000 – to be paid through credit card. This amount is often used to reserve the unit, giving buyers additional time to complete the transfer of remaining funds.”

The UAE Central Bank had instructed banks to stop financing the Dubai Land Department registration fees and real estate broker fees from February 1. The banking regulator will no longer allow customers to include the DLD and broker fees as part of their mortgage financing.

This could result in home buyers having to set aside a larger down payment. In addition to the required 20 per cent or 30 per cent property down payment, buyers will now need liquid funds to cover the 4 per cent DLD fee and 2 per cent agent fee.

Safe down payments

As well as the DLD and agent fees, the associated costs of buying a property in Dubai include a fixed DLD trustee fee of Dh4,200, 0.25 per cent of the loan amount as mortgage registration fee and a Dh500 title deed fee.

These amount to about 6 per cent to 7 per cent of the property’s purchase price. Banks used to finance 80 per cent of these costs. Now, the Central Bank has told banks to stick to the original loan-to-value ratio of 80 per cent of the collateral.

“In most cases, buyers who opt to use a credit card do so because they may not have immediate access to liquid funds but want to lock in a unit – particularly during high-demand launches,” Mr Syed says.

“While it can serve as a short-term solution, it’s not a widespread or recommended approach due to the high interest rates associated with credit card borrowing.”

This practice is more prevalent among end users, especially first-time buyers securing off-plan properties with lower initial commitments, he adds.

Property down payments for buyers with mortgages need to be self-sourced and a credit card is not accepted, says Sandeep Tekchandani, co-founder of mortgage advisory company YouAE Mortgages.

Typically, credit cards can be used to cover property transfer charges, the DLD fee, trustee fee, mortgage registration fee and developer service charges, he says.

“Developer booking amounts can be paid in the form of credit cards, so long as the merchant banks allow the credit card transaction and the customer's individual card spend is within permissible card limits. Certain bank cards can support this to be converted into an easy payment plan,” Mr Tekchandani adds.

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Issue for Indian buyers

Under Indian law, specifically the Foreign Exchange Management Act (Fema), there are clear rules about sending money abroad, says Anurag Chaturvedi, chief executive of financial advisory Andersen UAE.

Buying property overseas is considered a capital transaction, but credit cards are only allowed for spending such as travel, shopping or education, not for big investments such as real estate.

“So, when someone uses their international credit card to pay for a house, it can bypass the official route set by the Reserve Bank of India (RBI),” he says. “The legal way to buy property overseas is through the Liberalised Remittance Scheme (LRS).”

Indian residents can send up to $250,000 per year through an authorised bank with proper documentation and a one-year-old account. This route ensures proper reporting, tax compliance and RBI approval, adds Mr Chaturvedi.

The central bank clarified that if an Indian resident investor uses an international credit card (ICC) overseas, it is usually treated like a capital outflow and must comply with LRS rules.

“ICCs are meant for current account use [hotels, travel, etc.], not capital transactions like buying real estate. Since real estate purchase is a capital account transaction, using an ICC bypasses the LRS route and violates Fema,” Mr Chaturvedi adds.

“The investor could face investigations by RBI, the tax department or the Enforcement Directorate. Also, credit cards have high interest rates and forex charges, making them an expensive option,” he warns.

Gaurav Keswani, founder and managing director of Dubai-based financial consulting firm JSB, says there’s no shortcut and the 20 per cent tax collected at source still applies.

Developers and agents must stop encouraging non-compliant routes. Convenience today shouldn’t become a compliance nightmare tomorrow, he adds.