# If you were going to buy a house in 2-3 years time...



## ENP (9 April 2011)

What would you be investing in?

The dilemma between investing in low returns for cash and term deposits against the lure of higher returns in stocks.


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## Bill M (9 April 2011)

I would put it in cash/term deposits. If you asked this question in November 2007 you would still be losing 27% of your investment today 3 and a half years later.

I wouldn't be betting my deposit money on shares.  Your choice/gamble of course, all the best.


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## nulla nulla (9 April 2011)

ENP said:


> What would you be investing in?
> 
> The dilemma between investing in low returns for cash and term deposits against the lure of higher returns in stocks.




I would recommend that you liaise with the bank that you intend to get the home loan from. Start work on your relationship with them as early as you can.


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## trainspotter (9 April 2011)

Put the lot on BLACK 13 and spin the wheel.


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## So_Cynical (9 April 2011)

ENP said:


> What would you be investing in?
> 
> The dilemma between investing in low returns for cash and term deposits against the lure of higher returns in stocks.




I would be following a low average cost investment plan, buying quality stocks at low points in their price cycle, thus building a portfolio of stocks and a dividend/distribution stream.

Pretty much exactly what i have been doing since Nov 2008


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## Julia (9 April 2011)

ENP said:


> What would you be investing in?
> 
> The dilemma between investing in low returns for cash and term deposits against the lure of higher returns in stocks.



What is your basis for asserting stocks are going to provide you with higher returns than cash?


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## medicowallet (9 April 2011)

I'll tell you in 2-3 years time.

But I'd have to say, if you need every dollar (ie have zero tolerance for risk), then go the highest interest, most tax effective cash option you can find.

I


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## Pancakes (9 April 2011)

If you were looking at 4+ years you could get a first home saver account:

http://www.membersequitybank.com.au/personal/savings_accounts/first_home_saver.html


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## VSntchr (9 April 2011)

Julia said:


> What is your basis for asserting stocks are going to provide you with higher returns than cash?




Stocks have the ABILITY to offer higher returns than a bank account, FACT. I don't see how the post suggests anything otherwise. Doesn't mean that stocks will always offer a higher return...but I'm pretty sure that was implied or else his advice would merely be..."buy stocks".


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## trainspotter (9 April 2011)

VSntchr said:


> Stocks have the ABILITY to offer higher returns than a bank account, FACT. I don't see how the post suggests anything otherwise. Doesn't mean that stocks will always offer a higher return...but I'm pretty sure that was implied or else his advice would merely be..."buy stocks".




EH ??? IF you pick the "right" stocks then YES your post is valid. The area of concern that I see is that "someone" is saving for a deposit on a home. This money is to be used as an instrument to achieve financial freedom/roof over their heads/build a nest/ whatever the reason so I am not sure if buying "stocks" is the answer.

Depends on relegated risk and if in 2 - 3 years time that the end goal is still the same?

Anyhooooooooooo ....... When you walk into the bank of your choice to "borrow" the aforementioned monies to purchase your little piece of Australiana the bank manager is going to ask "SO WHERE DID THE DEPOSIT COME FROM?"

If you say ..... "I sold some shares worth 80k" ... then it is unlikely that it will succeed.

If on the other hand you evidence a saving pattern up to 50k worth of cold hard cash in a bank account over a 3 year period it would be looked at more favourably. That is what they are looking for BTW.

Then again there is always Keno, Blackjack and my favourite the Roulette wheel.

Put it all on black 13.


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## Tyler Durden (9 April 2011)

Pancakes said:


> If you were looking at 4+ years you could get a first home saver account:
> 
> http://www.membersequitybank.com.au/personal/savings_accounts/first_home_saver.html




I remember having a look at that and I could be wrong, but the only real benefit seems to be something like you get an additional $900, which for locking in your money for four years isn't really much??


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## Pancakes (10 April 2011)

Tyler Durden said:


> I remember having a look at that and I could be wrong, but the only real benefit seems to be something like you get an additional $900, which for locking in your money for four years isn't really much??




True.

So the maximum government co-contribution is $935 per year (or 17% or whatever you deposit up to $5,500). So you deposit  $5,500 the government will put in $935. You then earn 5.5% or whatever the bank pays you in interest. I wouldn't put any more than $5,500 in per year because you won't get any extra government contributions above that amount. The interest you earn is taxed at a concessional rate of 15% instead of your marginal tax rate and the government contribution is tax free.

You are locked in for 4 years though which sucks if you want to buy soon. Although if you buy a property before the 4 years is up the government will roll the savings into your mortgage after the fourth year. 

It's really only good for people who are happy to be locked in for 4 years, but an initial 22.5% return for such low risk is quite good I think.

Edit: Taxed at 15% http://www.ato.gov.au/individuals/content.aspx?menuid=0&doc=/content/00250962.htm&page=2&H2

Oh and the property you buy has to be your PPOR, so you have to live in it for 6 months or so after you buy it.

It would be interesting to know if you can buy an investment property before the 4 years is up and then still access the savings after 4 years when you purchase your PPOR?


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## againsthegrain (10 April 2011)

Roulette is good, with 50k you could get into a progressive system other wise poker has became very popular lately


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## Glen48 (10 April 2011)

House prices will still be going down and no where near the bottom , buy gold silver and keep out of banks because they will crash as well.. CBA has the most to loose due to leanding on over priced houses and I am lead to belive all but ANZ had to borrow money under TARP in 2009 according to _Money Morning_.


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## Tyler Durden (10 April 2011)

Pancakes said:


> True.
> 
> So the maximum government co-contribution is $935 per year (or 17% or whatever you deposit up to $5,500). So you deposit  $5,500 the government will put in $935. You then earn 5.5% or whatever the bank pays you in interest. I wouldn't put any more than $5,500 in per year because you won't get any extra government contributions above that amount. The interest you earn is taxed at a concessional rate of 15% instead of your marginal tax rate and the government contribution is tax free.
> 
> ...




Wow cool thanks, if I could 'like' your post I would 

So the co-contribution is $935 _per year_ (assuming $5,500 deposit)? I read it as just a once off thing?


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## youngone (10 April 2011)

Pancakes said:


> True.
> 
> So the maximum government co-contribution is $935 per year (or 17% or whatever you deposit up to $5,500). So you deposit  $5,500 the government will put in $935. You then earn 5.5% or whatever the bank pays you in interest. I wouldn't put any more than $5,500 in per year because you won't get any extra government contributions above that amount. The interest you earn is taxed at a concessional rate of 15% instead of your marginal tax rate and the government contribution is tax free.
> PPOR?




So if i were to put in $1000 per year, for 10 years, do i still gain all the benefits.?


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## VSntchr (10 April 2011)

youngone said:


> So if i were to put in $1000 per year, for 10 years, do i still gain all the benefits.?




No. The government contribution is for the first 4 years only. After that only the normal interest rate applies...


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## Pancakes (10 April 2011)

VSntchr said:


> No. The government contribution is for the first 4 years only. After that only the normal interest rate applies...




It's a minimum of 4 years. So if you put $5,500 in each year for 5 years you will get $935 for each of those 5 years. There is a cap of $80,000 though, so once you reach that amount you can't contribute anymore to the account.


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## Pancakes (10 April 2011)

youngone said:


> So if i were to put in $1000 per year, for 10 years, do i still gain all the benefits.?




If you put $1,000 in the government contribution is 17% so $170 each year for 10 years. I think...you might want to check with a bank just to make sure 

Try this calculator... http://www.moneysmart.gov.au/tools-and-resources/calculators-and-tools/first-home-saver-calculator

http://www.moneysmart.gov.au/managi...avings-accounts/first-home-saver-accounts#Are


> Are first home saver accounts right for you?
> First home saver accounts are good if you know you want to buy your first home in more than 4 years. The account can earn high interest and you get a government bonus to put towards your deposit.
> 
> If you think you may want to buy your first home earlier they may not be the best choice for you. Make sure you think hard about your future needs before opening a first home saver account. If, for example, you decide in 3 years that you'd rather move overseas or put the money into a new business, you won't be able to immediately withdraw the money from your account. The money will be transferred to your super and you won't be able to access it until you are 65.
> ...


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## Julia (10 April 2011)

ENP said:


> What would you be investing in?
> 
> The dilemma between investing in low returns for cash and term deposits against the lure of higher returns in stocks.






VSntchr said:


> Stocks have the ABILITY to offer higher returns than a bank account, FACT. I don't see how the post suggests anything otherwise. Doesn't mean that stocks will always offer a higher return...but I'm pretty sure that was implied or else his advice would merely be..."buy stocks".




1.  ENP was not offering 'ADVICE'.  He/she was the original poster *asking for advice*, i.e. he asks "What would you be investing in?"

2.  Read his next sentence.  It clearly makes the assumption that returns for cash will be lower than those from shares, with no defining qualifications about either asset class.

That's why I asked him to clarify the assumption.  Not because I need the answer, but because he probably needs to be clearer about what potential returns can apply to what asset class *in light of the funds being intended for home deposit.*


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## kingcarmleo (10 April 2011)

Just term deposits and blue chips.


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## ENP (10 April 2011)

I didn't say stocks would 100% surely perform better.

I just said the "lure" of higher returns. 

But yes, for the short time frame, term deposits/cash do seem the way to go. Protecting capital. Heard a quote from Warren Buffet saying he didn't get rich from making huge risky gambles with his money, he just tries to not make huge bad decisions and the rest falls into place.


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## Smurf1976 (10 April 2011)

Glen48 said:


> House prices will still be going down and no where near the bottom , buy gold silver and keep out of banks because they will crash as well.. CBA has the most to loose due to leanding on over priced houses and I am lead to belive all but ANZ had to borrow money under TARP in 2009 according to _Money Morning_.



On a positive note, all my debts are with CBA whilst the only real deposits I have with any of the big four are with ANZ.


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## Dowdy (10 April 2011)

Pancakes said:


> If you were looking at 4+ years you could get a first home saver account:
> 
> http://www.membersequitybank.com.au/personal/savings_accounts/first_home_saver.html




Thanks for the link but looking in to it, you can only save a max of 80,000K.

That aint much considering it's for a house deposit


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## So_Cynical (10 April 2011)

Dowdy said:


> Thanks for the link but looking in to it, you can only save a max of 80,000K.
> 
> That aint much considering it's for a house deposit




lol its a realistic amount 20% of 400K, for those that think 400K is not a realistic price to pay then you probably don't realisticly need a Govt hand out to get what you want.


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## Glen48 (10 April 2011)

Some one mention "investment property " there is no such thing. Never has been and never will in our life time..

Posted Mar 21, 2011 10:24am EDT by James Altucher in Newsmakers, Housing
Related: PKB, XHB, ITB, EQR, KBH, MTH, HXM
Editor's Note: The following blog post was written by James Altucher, managing director of Formula Capital, and originally published on his website:  The Altucher Confidential.  

Prior to the existing home sales report this morning, Altucher sat down with Aaron and Henry to discuss his financial and personal reasons for not owning a home.

Tell us what you think!

Many people have said to me in the past month, “I’m going to buy a home.” Or, “What do you think of the idea of me buying a home?” I like the second batch of people. They are my friends and it seems like they are sincerely asking for my advice. And I’m going to give it to them. Whether they meant it or not.

I have some stories about owning a home. One of them is here: “What It Feels Like to be Rich” where I describe my complete path into utter depravity and insanity. The other one is still too personal. It's filled with about as much pain as I can fit onto a page. Oh, I have a third one also from when I was growing up. But I don’t want to upset anyone in my family so I’ll leave it out. Oh, I have a fourth story that I just forgot about until this very second. But enough about me. Lets get right to it.

There are many reasons to not buy a home: [By the way, I also put this in the category of Advice I want to tell my daughters, including my other article: 10 reasons not to send your kids to college.]

Financial:

A) Cash Gone. You have to write a big fat check for a downpayment. “But its an investment,” you might say to me. Historically this isn’t true. Housing returned 0.4% per year from from 1890 to 2004. And that’s just housing prices. It forgets all the other stuff I’m going to mention below. Suffice to say, when you write that check, you’re never going to see that money again. Because even when you sell the house later you’re just going to take that money and put it into another downpayment. So if you buy a $400,000 home, just say goodbye to $100,000 that you worked hard for. You can put a little sign on the front lawn: “$100,000 R.I.P.”

B) Closing costs. I forget what they were the last two times I bought a house. But it was about another 2-3% out the window. Lawyers, title insurance, moving costs, antidepressant medicine. It adds up. 2-3%.

C) Maintenance. No matter what, you’re going to fix things. Lots of things. In the lifespan of your house, everything is going to break. Thrice. Get down on your hands and knees and fix it! And then open up your checkbook again. Spend some more money. I rent. My dishwasher doesn’t work. I call the landlord and he fixes it. Or I buy a new one and deduct it from my rent. And some guy from Sears comes and installs it. I do nothing. The Sears repairman and my landlord work for me.

D) Taxes. There’s this myth that you can deduct mortgage payment interest from your taxes. Whatever. That’s a microscopic dot on your tax returns. Whats worse is the taxes you pay. So your kids can get a great education. Whatever.

E) You’re trapped. Lets spell out very clearly why the myth of homeownership became religion in the United States. Its because corporations didn’t want their employees to have many job choices. So they encouraged them to own homes. So they can’t move away and get new jobs. Job salaries is a function of supply and demand. If you can’t move, then your supply of jobs is low. You can’t argue the reverse, since new adults are always competing with you.

F) Ugly. Saying “my house is an investment” forgets the fact that a house has all the qualities of the ugliest type of investment: 

Illiquidity. You can’t cash out whenever you want.

High leverage. You have to borrow a lot of money in most cases.

No diversification. For most people, a house is by far the largest part of their portfolio and greatly exceeds the 10% of net worth that any other investment should be.

For more on Altucher's personal reasons not to own a home, go here.


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## Julia (10 April 2011)

That is one of the most biased and ill informed pieces of nonsense I've ever read.

He ignores the capital gain if one buys at the right time, and totally fails to take account of the emotional and psychological satisfaction of owning one's own home, the security that offers, and the freedom to make whatever changes you wish.

To say it's a stupid 'investment' on the illogical basis that he's using, is short sighted and narrow.

These sorts of tracts are usually spouted by those who are trying to justify their own poor decisions where they have bought ill advisedly and sold similarly.


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## So_Cynical (10 April 2011)

Julia said:


> That is one of the most biased and ill informed pieces of nonsense I've ever read.
> 
> He ignores the capital gain if one buys at the right time, and totally fails to take account of the emotional and psychological satisfaction of owning one's own home




Its an American article.

http://www.jamesaltucher.com/2011/03/why-i-am-never-going-to-own-a-home-again/

Now quite as relevant in Aust because we are different...just ask robots.


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## FxTrader (10 April 2011)

> ... Saying “my house is an investment” forgets the fact that a house has all the qualities of the ugliest type of investment:
> 
> Illiquidity. You can’t cash out whenever you want.
> 
> ...




True enough when looking at a PPOR from a purely financial perspective, it's has more of the characteristics of a liability than an asset with entry and exit costs being extemely punitive on a percentage basis.  But discussion of the importance of home ownership can be a very emotive topic that brings non-financial factors into play.

I would say that home ownership is more of a religion here than in the states.  When I talk with many friends here their blind faith in capital growth and attachment to owning their own home at almost any cost frequently borders on the irrational (they rarely fully understand or examine all the costs involved in mortgaging a PPOR and how much capital gain needs to accrue for each year of ownership for them to just break even on sale).  The tired old cliche "rent money is dead money" gets rolled out time and again and the great fear of being priced out of the market by not getting in as soon as you think you can afford it.  Purchasing a PPOR is usually more of an emotional and lifestyle decision than a wise investment made after careful financial analysis.


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## AlexL (11 April 2011)

The first home savers acccount requires a minimum contribution of $1000 in four financial years. Given that we are approaching the end of this financial year, the actual time that your money is locked in is a little more than two years. I personally think that a guaranteed return of over 22% is a pretty good investment. Both the co-contributions and the cap on the account are indexed with inflation.
I hold a FHSA with Members Equity. 
Alex


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## Dowdy (11 April 2011)

So_Cynical said:


> lol its a realistic amount 20% of 400K, for those that think 400K is not a realistic price to pay then you probably don't realisticly need a Govt hand out to get what you want.





20% is a reasonable amount for a deposit but i'm looking for a 60-80% deposit. Why do you want to spend most of your working life paying off a mortgage and nearly half is interest payment alone?! 

Find a cheap place to rent and save like a mofo  

If you save 5-7k a month you'll have $250,000 saved up within 3 years


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## Reasons (11 April 2011)

Dowdy said:


> 20% is a reasonable amount for a deposit but i'm looking for a 60-80% deposit. Why do you want to spend most of your working life paying off a mortgage and nearly half is interest payment alone?!
> 
> Find a cheap place to rent and save like a mofo
> 
> If you save 5-7k a month you'll have $250,000 saved up within 3 years





If you can save the majority it is an excellent start. I have found this Noel Whittaker article really useful to explain a very efficient way to pay off a loan as quickly as possible and manage interest rate changes...


*NEWSLETTER

By Noel Whittaker*

Thursday, 4 May 2006

...

It’s important to understand the way loans work.  The repayments are normally shown as factors and these depend on the interest rate and the term of the loan.  Here are the factors for loans with interest rates from 6.5% to 9% over a range of terms that vary from 5 years to 30 years.  For example, if you had a loan of $100,000 at 7% and paid it back at $899 a month, the loan would be paid off in 15 years.  If your loan was $300,000 at 8% you would have to pay back $2,508 a month (300 x 8.36) if you wanted to pay it off in 20 years.



The factors are a great illustration of the way compound interest works.  Notice that relatively small increases in repayments will reduce the loan from 30 years to 25 years, but it takes a massive increase in repayments to increase it from 10 years to 5 years.  Imagine you had a loan of $100,000 at 7 % and you were paying it back over 30 years.  Repayments would be $665 a month and total interest payable would be $139,400.  If you increase those payments by just $42 a month to $707 a month, the term would drop to 25 years, you would pay $112,100 in interest.  That simple act of increasing your repayments by $42 a month ($9.67 a week) has saved you $27,300 in interest. 

Also notice that the effect of the rate diminishes as the loan term reduces.  A $100,000 loan at 6.5% over 30 years requires $532 a month – if the rate goes to 9% your payments will increase to $805 a month.  The increase is $273 a month.

However, if the term was 10 years an increase in rates from 6.5% to 9% could cause your repayments to increase from $1,135 a month to $1,267.  That’s just $132 a month.

This is why I urge people to pay their loans back at $12 a $1,000 a month if possible.  That will reduce the term to approximately 10 years and take interest rates out of the equation as the term of the loan will be largely unaffected by rate fluctuations.

If you can’t do $12 a $1,000, and I appreciate there are many of you who can’t, try to pay back at least $8 a $1,000.  As you can see from the above table this will keep your loan to around 20 years.  That’s not as good as a 10 year term, but it’s certainly better than 30.

CASE STUDY
You have a home loan of $200,000 at 6.5% which you are paying back at $2,271 a month over 10 years. If interest rates rise to 8%, and you maintain the same payments, the term will increase by only one year to 11 years. If you are paying back the $200,000 loan over 15 years you would be paying $1,742 a month. A rise in rates to 8% would extend the term by just three years if the payments of  $1,742 remained unchanged.

Provided you are not especially nervy, and can afford repayments in line with a 15 year term, staying with variable is probably your best option. Remember too, that if you are an investor the Tax Office is paying nearly half your interest bill. A rise of one percent is really only point five percent after tax.


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## Pancakes (11 April 2011)

Dowdy said:


> Thanks for the link but looking in to it, you can only save a max of 80,000K.
> 
> That aint much considering it's for a house deposit




I wouldn't use the FHSA alone. My plan for saving a deposit would be;

-Deposit $5,500 per year into the FHSA to get the maximum government co-contribution of $935 for 4 years
-If I had a partner have them open their own FHSA to get the maximum government co-contribution for 4 years (or less)
-Save as much as I possibly could for 4 years in another high interest (perhaps term deposit) account 

There is no reason the FHSA has to be your sole account for saving, in fact I'd recommend against that! Only put a max of $5,500 into the FHSA per year!


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## jbocker (11 April 2011)

AlexL said:


> The first home savers acccount requires a minimum contribution of $1000 in four financial years. Given that we are approaching the end of this financial year, the actual time that your money is locked in is a little more than two years. I personally think that a guaranteed return of over 22% is a pretty good investment. Both the co-contributions and the cap on the account are indexed with inflation.
> I hold a FHSA with Members Equity.
> Alex




I think that is a great tip Alex, I will talk to my kids about this. Waiting for the housing market to sort itself out for two and bit years might be a good thing (which I think is only going to go sideways for a while anyway). Now off to the FHSA site to find out more...


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## Sdajii (11 April 2011)

For me personally, definitely shares. Actually, that's pretty much what I've done over the last couple of years, and in that time I've multiplied what would have just been enough to pass as a deposit several times over by playing with that money with very speculative shares. If it continues as well as it has been going for much longer it will mean I have a full payment on a house rather than a small deposit.... yes, if it goes bad I may end up closer to where I started.

Of course, it depends on how good you are at trading, how much you like risk, and how much a risk gone bad will screw you up.

By nature I am a risk taker far beyond most peoples' preference, and I cringe at the level of safety desired by most people. Statistically that means you would probably cringe at my appetite for risk and not want to put yourself in the same position. Not all the risks in my life have gone as well as my stock trading venture  Of course, as I said, my stock trading venture could blow up in my face.

Some say it's better to be safe than sorry. Others say nothing ventured nothing gained. You should definitely be asking yourself this question rather than doing what other people would do.


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