Tag Archives: first-time buyers

Countdown to homeownership

Two years is an important time frame when it comes to buying your first home. According to Genworth Canada’s 2018 Financial Fitness & Homeownership Study, nearly one-fifth of aspiring first-time homebuyers expect to buy their home within the next two years. This preparation period provides a healthy amount of time to get your finances in order. Strengthening your financial position should be a priority given the mortgage stress test criteria to qualify and rising interest rates. Set yourself up for homeownership success with the following tips.

Determine how much home you can afford

Affordability is the cornerstone of responsible homeownership. Buying a home you can comfortably afford will ensure satisfaction and security. Mortgage changes introduced by the federal government over the past two years have helped to reduce the likelihood of buyers taking on more debt than they can reasonably afford. Want an estimate of how much home you can afford? Visit Homeownership.ca and use the What Can I Afford Calculator to find out what mortgage amount a bank or other conventional lender would likely qualify you for.

Build a monthly budget

Once you have an estimate of how much of a mortgage you’d be working with, use Homeownership.ca’s Mortgage Payment Calculator to determine your regular mortgage payments. Build a monthly budget around this amount, plus your other expenses. Live on this new-homeowner budget as early as possible so you get into the habit of spending within your means. Put any savings into your down payment savings account.

Save, save and save even more

Save aggressively so you can build that nest egg; in other words, it would be smart to save for your down payment, closing and moving costs in advance. Think about new ways to save more money every day. For example, even if you prefer to buy your latte at your local coffee shop, switching to the free coffee at your office will allow you to save an average of $3 daily, which you can put into your savings account. In two years’ time, that $1,400-plus will make a nice addition to your down payment.

Improve your credit score

Order your credit report from Equifax or TransUnion and check it thoroughly, contacting the credit reporting agencies if there are any errors. Between now and two years from now, work on improving your credit as much as you can.

Key steps you should take include the following:

  • Always make payments on time.
  • Pay down your consumer debt. (Avoid using more than 35 per cent of your available credit from credit cards and lines of credit.)
  • Don’t apply for more credit. (One exception to this rule is if you have no existing credit card. In that case, apply for a no-fee credit card, use it on a few small purchases and pay it off monthly. This will help you build your credit history.)

Stay the course

Job changes, car financing and applying for more credit can all affect your credit report or mortgage application, or both. Limit any major lifestyle changes or purchases to the start of your two-year homeownership countdown. As you move toward the mortgage pre-approval stage and house-hunting stages, avoid lifestyle or financial changes that could have a negative impact on your credit score or raise questions about your employment history.

Start dreaming and researching!

Use your free time to explore neighbourhoods and research the local real estate market. Go for a long walk and visit some open houses. These obligation free walk-throughs can help you refine your new-home wish list, clarifying priorities versus nice-to-have features. Even if you don’t have children right now, consider park and school proximity because your family situation may change one day in the future.

 

Source: Genworth.ca

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Benefits of Homeownership Reaffirmed in New Study

Despite deteriorating housing affordability across the country, buying a home is still the more affordable option when compared to renting.

A new report from Mortgage Professionals Canada has determined that, despite the rapid rise in home price, those who are able to invest in a home would end up “significantly better off” in the long term compared to renting.

The report, authored by the mortgage broker association’s chief economist Will Dunning, found that while upfront monthly costs are in fact cheaper in most locations, the “net” cost of ownership is less than the equivalent cost of renting in a majority of cases, and becomes even more cost effective over time.

“The costs of owning and renting continue to rise across Canada,” Dunning noted. “However, rents continue to rise over time whereas the largest cost of homeownership–the mortgage payment–typically maintains a fixed amount over a set period of time – usually for the first five years. The result is that the cost of renting will increase more rapidly than the cost of homeownership.”

Additionally, the costs of ownership include considerable amounts of repayment of the mortgage principal. “When this saving is considered, the ‘net’ or ‘effective’ cost of homeownership is correspondingly reduced,” Dunning added.

On average, the monthly cost of owning exceeds the cost of renting by $541 per month. But when principal repayment is considered, the net cost of owning falls to $449 less than renting.

Interest Rate Scenarios

The analysis compared the cost of renting vs. owning both five and 10 years into the future, with higher interest rates factored into the equation. In all cases, owning comes out ahead:

Scenario #1: If interest rates remain the same (using an average of 3.25%), after 10 years the average net cost of owning is $1,014 less than the monthly cost of renting.

Scenario #2: If interest rates rise to 4.25% after five years, the average net cost of owning falls to $1,295 less than the monthly cost of renting.

Scenario #3: If interest rates rise to 5.25% after five years, the average net cost of owning is still $726 less than the monthly cost of renting.

“By the time the mortgage is fully repaid in 25 years (or less) the cost of owning will be vastly lower than the cost of renting,” the report adds, noting that the cost of owning, on average, would be $1,549 per month vs. $4,655 for an equivalent dwelling.

Canada Still a Country of Homeowners

Despite rising home prices and deteriorating affordability, Canada remains a nation of aspiring homeowners.

The study pointed to the continued strong resale activity as one indicator of this.

Resale activity in 2017 was still the third-highest year on record, at 516,500 sales, just off the peak of 541,2220 sales in 2016.

But other polls have also found a strong desire among younger generations that still dream of owning.

RBC’s Homeownership Poll found a seven-percentage-point increase in the percentage of overall Canadians who planned to buy a home within the next two years (32%), and a full 50% of millennials.

Similarly, a RE/MAX poll found more than half of “Generation Z” (those aged 18-24) also hope to own a home within the next few years.

Perhaps the biggest question is whether those aspiring homeowners will have the means to surpass the barriers to homeownership, namely larger down payments and the government’s new stress test.

“While recent changes to mortgage qualifying have made the barrier to entry higher, those who can qualify will be much better off in the long term,” Paul Taylor, President and CEO of Mortgage Professionals Canada said in a statement. “Given the economic advantages of homeownership, Mortgage Professionals Canada would recommend the government consider ways to enable more middle-class Canadians to achieve homeownership.”

Despite its affordability benefit over renting, Dunning addresses some of the impediments of homeownership, namely the longer timeframe needed to save for the down payment. Despite higher home prices and larger down payments required, first-time buyers still made an average 20% down payment.

Additional Tidbits from the Report

Some additional data included in Dunning’s report include:

  • Average house price rose 6.2% per year from $154,563 in 1997 to $510,090 in 2017
  • Average weekly wage growth was up just 2.6% per year from 1997 to 2017
  • The average minimum interest rate for the stress test during the study period: 5.26%
  • The average annual rates of increase for the following housing costs:
    • Property taxes: 2.8%
    • Repairs: 1.9%
    • Home insurance: 5.4%
    • Utilities: 1.6%
    • Rents: 2.4%

Source: Canadian Mortgage Trends – STEVE HUEBL

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Affordability: What first-time homeowners need to know

Affordability. It’s a word that gets tossed around a lot when people talk about homeownership, but what does it really mean? Affordability is a term that’s both quantifiable (lending institutions use a formula) and a little bit subjective (lifestyle considerations factor in, too). Here’s what you need to know about affordability, and what it means for you.

AFFORDABILITY, AS DETERMINED BY LENDERS

For lending institutions and mortgage insurers, affordability can be summed up by the debt service ratios, as indicated by your gross debt service ratio and total debt service ratio.

Gross debt service (GDS) ratio
  • Homeownership costs (mortgage payments, property taxes, heating and, if applicable, 50% of condo fees), relative to household income
Total debt service (TDS) ratio
  • Homeownership costs (as outlined above) plus debt payments (credit cards, lines of credit, student loans, car loans, etc.), relative to household income

To qualify for mortgage insurance (mandatory for any home purchase with a down payment of less than 20% of the cost of the home), the highest allowable GDS ratio is 39% and the highest allowable TDS ratio is 44%.

TIP: Get a quick snapshot of your current debt service ratios via Genworth Canada’s What Can I Afford? calculator.

AFFORDABILITY, AS DETERMINED BY LIFESTYLE

Although debt service ratios are an indicator of bottom-line affordability, other real-world factors should be considered up front by potential homeowners.

Expenses like groceries, child care, transportation, and mobile phone and Internet services, for instance, are not covered by TDS, but they’re more or less fixed costs for many households. While they don’t affect debt service ratios, they should be included in your own budget calculations, as they eat up a large chunk of income.

Discretionary expenses like clothing, entertainment, memberships and kids’ extracurricular activities should also be factored into affordability considerations. Are there any areas where you could cut back? Or will some expenses disappear, such as when a car is paid off or when a child leaves daycare for full-time school?

SET A BUDGET YOU CAN AFFORD

Between the numbers-driven debt service ratios used by banks, trust companies and mortgage insurers and the discretionary lifestyle expenses that also affect your bottom line, you will find what affordability means for you.

It’s never too early in your homeownership journey to speak with a mortgage professional or financial planner to determine how much mortgage you can comfortably carry. This will help you assess your financial fitness and also help you set realistic goals on an achievable timeline.

Source: Genworth.ca (Homeownership.ca) 

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IN FOCUS: REAL ASSETS | REAL RETURNS Dispelling three common rent-to-own myths

 

Few investment strategies are as misunderstood as rent-to-own. The complexity and length of most rent-to-own agreements can be enough to get investors out of their comfort zone , while others have outdated notions about the operators, the quality of the tenant buyers and the overall viability of rent-to-own itself.

As co-founder of Homeowners Now, Canada’s leading rent-to-own company, Dale Monette has fielded every conceivable question about the industry, educating investors about the remarkable returns on offer, and altering their perceptions about a strategy too few of them have fully investigated. CREW asked Monette to help dispel three of the most commonly held myths around rent-to-own.

1. Rent-to-own tenant buyers are too fiscally irresponsible or not trustworthy enough to to secure financing from a lender.

This misconception may provide the greatest barrier between investors and the sizeable returns offered by rent-to-own transactions. Rent-to-own clients are often assumed to be desperately poor or living on the margins of society, but at a time when more Canadians than ever are struggling to find financing, this antiquated notion just doesn’t hold up to scrutiny.

“Most of the tenant buyers that join our program are families, new arrivals or divorcees who have a ‘lock-up’ period for their assets and purchasing power,” says Monette. “Whatever their situation, our typical buyers have saved a considerable amount of deposit money – the average for our clients is $16,000 – but for a combination of unique of reasons they are just shy of being able to purchase the home they require. Across our portfolio, the average dual income family earns an average of $111,000, so these are not desperate people. But they don’t want to rent, they don’t want to move and they’re ready to give their life savings in order to buy a home for their families.”

Monette admits that some applicants do fall into the stereotypical “credit mess” category, but adds that Homeowners Now’s 29-point screening process has proven effective in finding the best candidates for homeownership.

“We focus on the lowest risk, highest quality clients that we can find.”

2.  Rent-to-own is an unregulated industry, which leads to inconsistent rules, legal uncertainties and a slew of potential problems.

Most of us have seen a photocopied sheet of paper, hastily taped to a lamp post and flapping in the wind, advertising rent-to-own opportunities. Such “advertisements” rightfully raise questions about that particular operator and his ability to provide the legal and fiscal stability a successful rent-to-own transaction requires. They also raise legitimate questions about the lack of standardization typically seen across the industry.

“There are probably thousands of mom-and-pop investors who do one or two rent-to-own deals a year – maybe only one or two deals in total – who might not have legitimate documentation, who might deal in handshakes, and who might take the tenant buyer’s deposit,” Monette says. “These small operations inevitably suffer from a lack consistency and a lack of sophistication.”

Monette encourages investors worried about inconsistencies across the space to ensure any company they partner with belongs to both CAROP, the Canadian Association of Rent-to-Own Professionals, and the Better Business Bureau. Monette, who was recently elected CAROP’s Vice-President of Finance, says being recognized by both organizations, as Homeowners Now is, ensures a company’s adherence to legal standards and its use of certified professionals.

“Rent-to-own is not the wild west it once was,” he says. “There are organizations out there dedicated to holding rent-to-own operators to high standards of professionalism. CAROP and BBB bring a level of accountability to the space that has had an undeniably positive impact.”

3. Most rent-to-own transactions fail.

As one of the leaders of a company with a 100% success rate, Monette knows why so many of his competitors’ deals fall through. It often comes down to a few simple words.

“Most other operators use what’s called an Option to Purchase agreement. It’s quite standard, but it has a lot of risks inherent for the investor and the operator.” Monette explains that, because it’s an option, tenant buyers can actually demand their deposit back if they don’t purchase the house, thereby torpedoing an investor’s returns.

Monette says Homeowners Now requires their tenant buyers to sign a Deferred Purchase agreement, which legally obliges them to either purchase the house at the end of the lease term or lose their deposit.

“We want to show the tenant buyers that there is risk involved. We find that they are more motivated and more engaged in the program when they’re compelled to buy. It helps simplifies things, too, which is another benefit to investors.”

By addressing the rent-to-own sector’s biggest failings, Homeowners Now has created some of its greatest success stories.

Source: Canadian Real Estate Wealth – Mar 13, 2018

 

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Make your deposits carefully as they are rarely refundable: Ask Joe

Providing a deposit on a home is both a gesture of good faith and a serious commitment, Joe Richer writes.

I’m very interested in buying a certain house, but the seller wants me to fork over a really big deposit. If I change my mind, can I get my deposit back?

The short answer to your question is that, in most cases, real estate transaction deposits are not refundable.

There’s no set amount for deposits, however. If the owner’s demand for a large deposit is a major sticking point, you could ask your real estate representative to try to negotiate a lower deposit amount with the seller.

A deposit is the money you put down to secure a property that you want to purchase. Providing a deposit is both a gesture of good faith and a serious commitment. Once the seller accepts your written offer, it becomes an Agreement of Purchase and Sale (APS), which is a legally binding contract.

Once the APS is signed and the deposit is provided to the seller’s rep, attempting to renege on the APS by saying, “Sorry, I’m no longer interested” is highly inadvisable. You will almost certainly lose your deposit. The seller also might sue you for damages for any difference between the amount of your offer and the amount they accept from another buyer, along with any additional legal fees and carrying costs. You don’t want to go down that road.

Deposits are sometimes returned to would-be buyers when conditions are placed on an offer and the conditions aren’t satisfied. For instance, if you make an offer on a house on the condition of financing, but your bank won’t approve it. Or your purchase depends upon the successful sale of your current home, but it doesn’t sell in time. Or you make your purchase conditional on a home inspection and the home inspector discovers a problem that stops you from moving forward.

If you can’t go through with the purchase because your conditions haven’t been met and you want your deposit back, you’ll have to sign a release form and get the seller’s signature, too. It’s a pretty straightforward procedure and sellers will usually go along with such requests. But if the seller suspects you didn’t act in good faith, they could refuse to hand over the money.

What happens next? Well, the deposit would stay in a trust account, usually with the seller’s brokerage, and the dispute between you and the seller would become a legal matter. If you and the seller are unable to arrive at a settlement, a judge could eventually release the funds through a court order. But I’ll warn you: that can take a long time.

It’s a myth that a seller can pocket a buyer’s deposit any time a deal falls through. Cases involving deposits of $25,000 or less can be decided in small claims court, which is relatively inexpensive and easy for ordinary Ontarians to use. Cases involving larger deposits, however, are decided in Ontario’s much more formal Superior Court of Justice. Court cases can quickly become expensive, so you should carefully consider all of your options before taking this route.

If you’re serious about buying this house, I strongly recommend working closely with both a lender — to get your financial ducks in a row — and a real estate salesperson before you commit yourself to a deal and hand over a deposit.

Source: By Sat., Jan. 27, 2018

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HOW TO BUY A TORONTO CONDO IN 2018: NEW RULES + TIPS

How to Buy a Toronto Condo in 2018

Whether you’re a first-time buyer or a seasoned investor, there are new rules in 2018 that you will want to understand if you plan to buy a condo in Toronto. In this blog post we are going to explain the new rules and give you some tips to navigate them.

The 2018 condo market at a glance:

How to Buy a Toronto Condo in 2018, average price for condos

What are the new rules and changes?

 

We spoke with James Harrison, President of Mortgages.ca, to give us a full understanding of what to expect this year.

The new rules are simple:

As of January 1st, 2018, the Bank of Canada’s “Universal Stress Test” is in effect.

The buyer must now qualify for their mortgage based on the 5yr posted rate (4.99% today) or their contracted rate plus 2.00%, whichever is greater.

 

What does it mean for buyers in 2018?

 

“In my opinion, this will negatively impact one’s buying power by approximately 15-20% on average,” says James Harrison.

This stress test is an expected addition to the federal government’s measures to limit over-leveraged buyers from entering the housing market. In February of 2016, the federal government raised the minimum down payment from 5% to 10% for properties between $500,000 to $1 million. As we discussed in a previous blog post about those down payment rules and changes, the aim was to “reduce taxpayer exposure and support long-term stability.”

In October of 2016, a first round of stress tests was introduced to target insured mortgages (borrowers with less than 20% down payment). These borrowers were required to qualify at the Bank of Canada’s posted rate, which was 4.64% at the time, in hopes of creating a buffer against over-leveraged home purchases.

The newest round of stress tests is also about creating a buffer zone, but it applies to uninsured mortgages (borrowers with 20% down payment). Effectively, everyone applying for a loan through a regulated lender will now be stress tested. In a previous post, we explained in plain words how your buying power may change under the new mortgage rules.

“This will have a huge impact on some buyers but not all,” says James Harrison. “I believe this will negatively affect first time buyers as they tend to have lower incomes and also carry some debt from school. With one’s buying power negatively affected by 15 to 20% you would think this will mean prices will come down. I would be surprised if prices came down more than 5% in 2018.”

“For the well qualified buyers (those with higher incomes and little to no debt) 2018 will most likely see less competition, which could mean more of a buyer’s market. We have not seen this in a very long time in the GTA.”

“If you purchased a property prior to January 1st, 2018, you can still qualify for a new mortgage based on the old mortgage rules (with some lenders). Some top Brokers may also have lenders that can still qualify clients under the old rules (or at least using the discounted 5 fixed rate of 3.29% for example) and a 25yr amortization. This can increase one’s buying power by about 10- 15%.”

“If a buyer bought a property (same for pre-construction) prior to October 2016 (they could also qualify for an insured mortgage based on the rules prior to the first stress test for insured buyers). This is a huge benefit for some buyers of pre-construction units.”

 

What to do if you’re not approved for a mortgage under the new rules?

 

“If a buyer no longer qualifies to purchase a property they want they may have to look for a strong co-borrower to sign on to the mortgage to help increase the income and bring the debt services ratios in line.  Unfortunately, this may mean a lot more potential buyers will now be looking for a rental property, which in itself is already very challenging in Toronto.”

Alternatively, there are mortgage lenders that operate outside The Office of the Superintendent of Financial Institutions (OSFI). The ‘stress-tests’ apply only to lenders that are regulated under OSFI, such as the Big Five banks, while some second-tier banks and credit unions fall outside the new rules. These lenders have often been painted as “shadow lenders,” but they do fill a gap in the home buying process.

For buyers who don’t approve under the new mortgage stress tests, these non-regulated lenders can be a viable option and many of them offer rates competitive with top tier banks. One thing to keep in mind, however, is that non-regulated lenders are still hoping to limit risk, which means they tend to prefer borrowers with strong credit history. If your credit is weak, you may face higher rates on your mortgage. As always, it’s best to do some research.

“It is more important than ever for each and every buyer (or anyone looking for a mortgage) to connect with a very experienced Mortgage Broker. Going to your local bank branch is simply not a smart option anymore and has not been for years, but the new stress test will show this even more. A good Mortgage Broker will be able to help explain this fully and find you more options.  Even if you are a well-qualified buyer you may not qualify with your bank but you may still qualify for excellent schedule A products with another lender.  Do not give up until you speak with a good broker.”

 

Why is the government implementing these new mortgage rules?

 

“The reality of these most recent mortgage rules is that the federal government has serious concerns with the level of personal debt loads in Canada. So, they are continuously coming out with ways to help make sure everyone can truly afford the mortgage they are taking on. I personally feel this was too much, and I would not be surprised if the government is forced to pull this back within the next two to three years.”

“I am optimistic that 2018 will still be a strong year in real estate, but realistically a lot of buyers may be out of the market completely. I expect that 2018 will most likely be the year of mom and dad providing the down payment and co-signing for the mortgage as well.”

“I strongly encourage each and every buyer to contact a well-qualified and experienced mortgage broker for all of their mortgage needs, whether it is a purchase, refinance, or renewal.”

Source: Data sourced via Condos.ca on Jan 4, 2018

 

 

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What to do about the new mortgage rules

The new mortgage rules mean buyers will be able to afford to borrow 20 per cent less than under the previous rules, according to some experts.

Financial experts have some tips on how to handle the new mortgage “stress test” rules. The new mortgage rules mean buyers will be able to afford to borrow 20 per cent less than under the previous rules, according to some experts. 

Starting Jan.1, home buyers faced a new challenge in addition to rising prices and a restricted supply of available homes — a mortgage stress test designed to cool the overheated housing markets.

The test, introduced by the Office of the Superintendent of Financial Institutions (OFSI), requires the qualifying rate for an uninsured mortgage to be the greater of the Bank of Canada’s five-year benchmark rate (currently sitting at 4.99 per cent) or the rate homebuyers negotiate with the bank plus two percentage points.

That means even a buyer who negotiates a mortgage at 3 per cent will have to show they can cope with payments rising to 5 per cent.

A report by Mortgage Professionals Canada estimates the new rules mean buyers will be able to afford to borrow 20 per cent less than under the previous rules.

The Star asked financial experts for advice on how best to handle the new regime.

Article Continued Below

Clear those debts

One of the best ways to avoid the stress test derailing your home-buying plans is to first pay off any other debts you might have, said Paul Taylor, the CEO and president of Mortgage Professionals Canada.

“Any debt you are carrying will affect the mortgage you can qualify for, so you really should be doing the best to eliminate any credit card or outstanding loan debt before going to try to arrange a mortgage,” said Taylor.

Check the fine print

Some experts had urged clients who were going to hunt for a new home early in 2018 to lock down a pre-approval for a mortgage before Jan.1. Some lenders offered an exemption to the new stress test if you bought a home within 120 days of being pre-approved.

If you were pre-approved at that time with the 120-day window, you should talk to your mortgage broker to get a clear understanding of the deadline and what it will take to meet it.

According to Integrated Mortgage Planners president Dave Larock, “repeat or move-up” buyers, looking to take on bigger or pricier homes than what they currently own, will be hardest hit by the new rules. Many first-time buyers have already been putting down less than 20 per cent, forcing them to undergo another stress test that has been in place for the last year.

Make adjustments

But James Laird, the co-founder of financial comparison platform Ratehub, said he thinks all levels of buyers will have to make some adjustments to their plans.

If you can’t delay buying in order to build up a bigger downpayment, you may have to just accept that you can afford “a little bit less house” than previously. In some cases, you might even need to resort to the Bank of Mom and Dad for help qualifying for the same mortgage that you could have secured on your own earlier.

You might be further ahead saving longer to make a larger downpayment later, perhaps in time for a long-rumoured drop in house prices, Laird said.

Timing is key

Laird suggests doing your research and consulting with a mortgage broker, because there are some exceptions and a few groups of people using traditional lenders who will also not be subject to the new regulations.

For example, if you signed a contract to buy a pre-construction condo before Jan. 1 that you have yet to move into, you’ll still fall under the old rules.

And, says Larock, “If you bought prior to Jan. 1, even if you close after Jan. 1, you will be grandfathered (into the old mortgage policy), but you need a firm offer to purchase prior to Jan. 1.”

You’ll also be able to sidestep the test, says Taylor, if you nab a mortgage from an alternative lender, like a credit union that doesn’t have to apply the test because it falls outside the regulations covering banks and other traditional lenders.

But not everyone will be able to get off the hook.

If you scrambled to buy a home before the new regulations kicked in or even long before that, when your mortgage comes up for renewal, if you chose to switch lenders, you will have to qualify under the new policy, warns Taylor.

“I suspect that means a number of people’s mortgage renewals will probably be issued at slightly higher rates than they previously would have been because the bank is going to know you won’t have the ability to take your mortgage anywhere else,” he says. “That’s not going to be good news for everyone.”

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Source: TheStar.com – By Mon., Jan. 22, 2018

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