reduce debt to lower TDSR

About Deleveraging

With prevailing interest rates much higher than last year, we certainly see more people contemplating doing a lumpsum paydown whilst refinancing their home loan.  Then there are those purchasing their first property but opting for a much lower LTV (loan to value) than what they are entitled to (maximum 75% for first mortgage) for very much the same motivation – to reduce debt.

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Nobody wants to make the banks richer.  It definitely makes financial sense to deleverage as interest rate rises especially if it goes above 2.50% (CPF Ordinary Account interest), and if one is holding on to surplus funds in cash or fixed deposits. It might be hard to achieve such risk-free returns.  Still, we like to share some thoughts on this topic of paying down debt versus access to liquidity as we think more deliberation may needed.  Some of these considerations are often overlooked.


1. Drawing Out Equity Term Loan Later May Be Difficult

To illustrate this point, we use a typical purchase scenario of a first-time home buyer (couple) who could be borrowing a typical loan of $750,000 towards purchase of a unit at a new launch project:

Purchase Price                        = $1,000,000

Downpayment in cash            = $50,000        (5% deposit)

Combined CPF to be used      = $200,000

Bank Loan                               = $750,000      (maximum 75% LTV for 1stmortgage)

Let’s now suppose instead of using $750,000, the couple decides to take a smaller loan of $500,000 as they like to deploy all their cash on hand of $250,000, hence they will be using total of $300,000 cash towards the purchase (ignoring transaction costs and stamp duties etc):

Purchase Price                        = $1,000,000

Downpayment in cash            = $50,000        (5% deposit)

Combined CPF to be used      = $200,000

Cash to be deployed                = $250,000

Bank Loan                               = $5000,000    (LTV only 50%)

Let’s imagine 5 years later and the value of the property has now appreciated by 20% to $1.2m.  The couple now plans to buy a Universal Life plan which requires an upfront payment of $300,000 in premiums and they reckoned it would be good to take out an equity term loan (ETL) from the property.

Property valuation                               = $1,200,000

Outstanding loan                                 = $420,000

CPF used (add accrued interest)         = $370,000 (both initial lumpsum plus servicing over 5 years)

An ETL is a loan taken against the equity portion of the property value, which would have increased over time from both a reducing loan and a rising valuation; it is disbursed directly as cash to the borrower and must of course come from the same lender who has a charge on the property.

Equity Term Loan eligible to be withdrawn = 75% of valuation less outstanding loan less CPF used

= 75% of $1,200,000 – $420,000 – $370,000

= $110,000

To their surprise, the amount they could withdraw is less than half the additional cash portion ($250,000) they have deployed voluntarily at point of purchase.  And they were hoping for more than $250,000 as their property has also increased in value by $200,000.

The same situation will occur when homeowners prepay partially on the loan using cash on hand whilst refinancing; when situations change later on and they decide to go back and ask for a term loan on the mortgaged property, they might be disappointed especially in situations when a lot of CPF funds has been utilized over the years.

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2. Access To Liquidity – Worth Paying?

So, what are some of these situations that may require access to liquidity or cheap source of funds?  The list below is by no means exhaustive:

  • Investment opportunity (eg when stock market crash, distressed sale, etc)
  • Starting a business
  • Buying protection and annuity in lumpsum when it is cheaper (eg Universal Life plan)
  • Childen’s overseas education
  • Family crisis due to accidents, medical costs, etc
  • Tide over challenging times when there is change in employment situation

Here we are referring to financial commitments beyond the usual emergency or rainy day funds which financial advisors generally advise setting aside at least 6 times of one’s salary or income.  Some people might feel more secure with a 12-month’s buffer.

When situations arise that require a sudden lumpsum commitment – the cheapest source of funds one can lay hold of has got to be that from an ETL as it is secured against an asset.

In a report covered by Straites Times just last month, both MAS and IBF (Institute of banking and finance) estimated that 100 out of 121 jobs in the finance sector of Singapore would see tasks being displaced by automation and AI within the next three to five years.  The finance sector is not alone here.  This trend is happening world-wide and all industries will be impacted in the next 10 years.

With such forces shaping labour markets today that is unseen in past decades, our government is certainly worried.  Job security is no longer what it used to be. There is wisdom to ensure one has access to liquidity at all times, rather than paying down to the maximum on a mortgage with no leftover funds to help service the loan duing such unforeseen periods which may last longer than expected.


3. Interest-Offset Account May Be A Solution

For those who with substantial funds on hand and unsure of how much of it to pay down on a home loan, an interest-offset account may just be the solution.  For full explanation of how that works, you may refer to a recent article here.

 An interest-offset account has the same effect of prepaying down on a home loan, but without having to actually prepay. In that sense, it is the “most ideal” replacement for ETL as one can effectively withdraw or get back the same amount of cash used to prepay when there is a change of plan, without being subjected to restrictions on ETL limits and unaffected by CPF usage in the property.

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 This is where some people get confused.  We often get feedback that the return from such an interest-offset account is not attractive enough as one can easily beat this rate by investing in bonds or other investment vehicles like REITS, Perps, etc. That is true.  However, we are not talking about comparing yield or returns from investment.  All investments carry risks.  Just look at preference shares of Hyflux.  And it’s easy to put money in, but not always the same when it comes to taking money out.  If bond prices crash all of a sudden, investors might not be able to liquidate without incurring a substantial loss.

Interest-offset account is a place to park liquid funds (where there is no intention to deploy for investments where one may lose access or even the principal sum), and the more appropriate comparison woud be fixed deposit account or high-interest savings account like DBS Multiplier, OCBC 360, UOB One Account, etc.  For the former, one often needs to commit at least 12 months to get a reasonably-good interest rate.  For the latter there is often a cap, with the need to spend a certain amount on credit cards. In situations where one is unable to maximize such risk-free returns from various banks, and finds it hard to keep track of all qualifying criterias that keep changing, the easiest way is perhaps “pay down” a substantial amount in an interest-offset account. Period.  No hassle. No tracking. Withdraw and put back anyime when needed. Or perhaps get an interest-offset account as a standby “risk-free” interest-earning facility, when you move your liquid funds in between the various promotions for fixed deposits and high-interest savings account.

It is also noteworthy to highlight, with an interest-offset account, there is somewhat of a “reverse compounding savings effect” as more of the monthly repayment each month goes into reducing the principal loan, thereby leading to lower interest to be paid in the following month, and so on.  We will illustrate this point in a subsequent article so watch this space.

Speak to us today if you are looking to refinance to a mortgage with an interest-offset feature and enjoy a special $150 Refinancing Valuation Fee Offset from us, subject to min loan of $500,000. Other terms and conditions apply. Speak to our consultants today.

 Since 2014, has provided thought leadership in the mortgage planning space in Singapore, taking deep dives into the latest developments in the industry, providing useful mortgage tips, and making sense of rate movements.  We seek to build trust with clients over the longer term instead of doing product-peddling for quick one-time deals.  That’s why we always present “whole-of-market” perspective including home loan packages that some banks do not pay us.  Read our clients’ testimonials.

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home loan smart choice

Best Mortgage Strategy

On 29th January last year 2016, we made the call to buy DBS stock (or for that matter any of the three local banks’ counters) by using an equity term loan on your private property, when it goes below $14 after being clobbered by woes in O&G sector.  Here’s the blog article for those who missed it.

We gave two scenarios in the article and in Scenario B, we assumed it will take five years for DBS stock price to recover back to $21.  Guess what? If you had followed our advice then and took that bold step of gearing up on an equity term loan for what we deemed as the “best mortgage strategy”, you need not wait five years.  DBS stock closed just a shade below that two weeks ago on 11 May 2017 at $20.93, in just about one and a half years since we made that call!  Perhaps consider taking some profit now.

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Look.  This is not a website for stock investment.  We are not here to ask anyone to use leverage to invest in structured notes, hotel rooms, crowd-funding, or the many other forms of investment schemes out there especially those touting returns above 10% p.a.  To do that comes with huge responsibility which we do not take lightly, neither are we qualified to do so.  I have many people lose their principal sum in investments so what if you have high yields?

Over at MortgageWise, we exist with a single-minded mission and purpose – to be long term partners with all our trusted clients in helping them save on interest costs.  We dabble in all things mortgage, be it onshore or offshore, and nothing else.  This is the promise of our brand.  We do see great wisdom in taking an active approach to mortgage costs management, rather then merely refinancing from one bank to another which is a more passive approach.  Hence, we make that call last January when the opportunity arises.  And we will make the same call again when DBS stock does retrace back to a higher support level next time round – below $16! You do need to take a medium to long term view of five years for this strategy to work.

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When will that happen again no one knows.  You need to get ready when the time comes.  It will be a good exercise now to take a look at how much you could “offset” your mortgage costs should you be able to buy DBS even at above our target price say at $18 (our recommended entry is below $16) and wait for it to rise up to $25?

Using our concept of equity term loan but employing 80:20 rule in the deploymernt, let us take a look at the revised numbers one more time using a similar example:

Current market valuation: $1,300,000

Current outstanding loan: $600,000

Remaining loan tenure: 22 years

Total CPF used todate towards property: $200,000

Maximum term loan allowed: $240,000 (80% of valuation less outstanding loan less CPF used)

These will be the assumptions used:

  • Refinance with a geared-up maximum term loan of $240,000 on a floating rate FDR home loan today at 1.38% p.a. Hence total new loan will be $600,000 + $240,000 = $840,000
  • Interest rate increase to happen exactly at mid of the year so if FDR increase by 0.50% p.a. during the year and one starts at 1.38% in Jan but ends up at 1.88% by Dec, we will assume the average increase is half (0.25%) and compute monthly instalment for the year based on 1.38+0.25 = 1.63%
  • Buying DBS stock at $18 and target to sell only at $25
  • With $240,000 term loan, we will only invest 80% or $192,000 and park 20% or $48,000 aside to service the higher monthly repayments from a bigger loan.
  • With $192,000 invested one-time at $18, ignoring transaction costs involved, the total profit on exit at $25 will be $192,000 x 7/18 = $74,666
  • In Scenario A, we assume it takes two years for DBS to hit $25 and FDR interest rises by 0.25% p.a. which is the most likely scenario
  • In Scenario B, we assume it takes five years for DBS to hit $25 and meanwhile FDR interest rises by 0.25% p.a. in first two years but the pace increases to 0.50% p.a. in the next three years

Instead of straight-line computation, we will now use more realistic ammortisation model to look at the actual projections over the two and five years’ holding period.  We will use our proprietary Interest Simulator tool to study the actual costs involved.  Once again in this discussion we just use DBS stock as an indication but it can also be OCBC or UOB depending on your preference between the three local banks and which you think has the highest long term potential.

equity term loan difference

Notice the profit of investing just 80% of the term loan ($192,000), at $74,666, is so much more than the additional interest you will be paying from an enlarged loan be it in Scenario A ($7,239) or B ($20,489).  In fact, the profit is so spectacular that it covers the entire interest for both scenarios even in Scenario B where FDR rises at twice the pace in the final three years (total interest $71,711 over five years)!  In essence this means that even if you have to wait for five years to achieve exit price of $25 for DBS, your entire mortgage of $840,000 is essentially “self-funding”.  One caveat though is that you may need to use your own funds to service the higher monthly repayment on a geared-up loan should that 20% of term loan set aside ($48,000) runs out after a period of time.

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Now you know why we advocate buying bank stocks as the best mortgage strategy.  You have less to fear even if you are on a floating rate mortgage as when lenders increase your mortgage interest over the years, chances are they are also sending their stock price higher with growth in NIM (net interest margin) – in a way your interest cost will be “hedged”.

What’s more, to increase your profit further, actively manage your interest costs while waiting, by working with a professional mortgage consultant who ensures you always get the lowest home loan interest throughout! Speak to us today.


At MortgageWise, we seek to provide thought leadership in the area of mortgage planning in Singapore, taking deep dive into developments and news on mortgages & helping clients track interest rate movements.  We do not just go for one-time business with clients but rather choose to build long trusting relationships by giving truly independent advice to the extent of losing the deal.  We strive to become the first-choice mortgage partner for homeowners and the creditable distributor of mortgage products for banks and financial institutions in Singapore.


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reduce debt to lower TDSR

Equity Term Loan Or Stay Debt-Free

What is an Equity Term Loan (ETL)? In short, it is a term loan that is taken out against the equity (that portion which has been fully paid) in a property, or some calls it a 2nd mortgage on the house (note ETL is only available for private properties and not HDB). It has to come from the same lender as the 1st mortgage which is the housing loan. However in terms of the order of charge (claim in event of foreclosure sales), it is not 2nd charge, but a 5th charge loan as the order goes like (see CPF website):

5th charge loan for term loan

And because the claim comes only after one’s CPF money and accrued interested is repaid, lenders will need to take out this portion before it determines how much equity is left to be “cashed out”.

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To give a simple example, Mr. Lim buys a property for $800,000 ten years ago and opted for 80% housing loan at $640,000. Today the property has appreciate to $1.1m and he has paid down diligently reducing the outstanding loan to $450,000 in the meantime. He uses CPF to service the loan partially every month and todate has utilized around $300,000 in all from his CPF towards this property, including the initial 15% at the purchase and interest accrued. If this is the only mortgage that Mr. Lim has in his name, the maximum ETL that he is eligible to cash out now (subject to income) would be 80% of current valuation ($1.1m) less outstanding loan ($450,000) and CPF utilized including accrued interest ($300,000), ie. $130,000. Obviously the term loan quantum is largely determined by how much the valuation has gone up by and how much of CPF is utilized towards repayment. Those who have bought properties in Singapore more than 10 years ago and have used mostly cash (leaving CPF funds to earn 2.5% interest) to service the mortgage will be able to “gear up” on a bigger amount

After paying down on mortgages over the years, will it not be silly to gear up and get indebted and start all over again? Surely the banks will love that as they get to earn a “second round” on the same property. Well, that depends on a few factors like age, financial profile, risk appetite, ability to generate returns, etc. In Asian context where the culture is towards frugality and savings, most people will like to be debt-free by a certain age. However the smart use of leverage can bring savings and profits for some. There is no cheaper way to get leverage on a secured facility like mortgage at less than 2% per annum interest than borrowing on credit cards or unsecured facilities at 2% per month, or on hire purchase loan to buy a car (effective interest is much higher), or on a renovation loan or unsecured term loan at 6% interest, or on margin trading account for stocks at 6% interest, etc. You get the idea. If you are taking on any of these other forms of debt like a car loan, and you actually have the capacity in your mortgage to ask for a term loan, then you may not be doing the wisest thing, at least financially.

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So let’s take a look at what are some possible uses of an ETL especially in the next few years:

  • To buy a car
  • To renovate a house
  • To restructure all unsecured debts to one single secured facility at lowest interest
  • To start a new business or for general working capital
  • For that first UK investment making use of the once-in-a-lifetime opportunity brought about by Brexit
  • For investments that could generate a higher return than one’s cost of funds
  • Just for rainy days ahead in an uncertain job market (put in risk-free Fixed Deposits of up to $50,000 each in various banks)

My favourite amongst all the uses of an equity term loan is to use the cash to buy back the stocks of the very institution that is making money from you – the 3 local banks in Singapore. However that window has now closed as one needs to get in at the right price. And if you have followed my blog here and acted on our call back in January this year and bought into DBS at $14 a piece, you would be sitting on a tidy profit of almost 30% with DBS now back to $18!  That to me is the best mortgage strategy that one could deploy – go offensive instead of just defending (refinancing for lowest rates).

Finally, if you do see the need for an ETL over the next few years, what better time than now to take it on a 1.99% fixed rate (important so that your cost of funds is locked down while you go about hitting your financial targets) over the next 5 years? Just as a general rule of thumb I use, anything below 2% p.a. cost of funds is deemed financially attractive, especially when the average lending costs in Singapore over the last 30 years hovers much higher than that (see 3-month SIBOR chart):

correlation us fed funds rate and singapore SIBOR


One last caveat I need to give whenever I touch on the topic of debt – understanding of self and how one is able to manage his emotions especially when it comes to greed and fear is of paramount important. There are many investors who are really a lot worst off financially than when they first started and they are in fact better off deploying their funds to fixed deposits instead – yes the returns may be meagre and not in keeping with inflation, but that is better than losing one’s principal capital. It is hard to say who will have the last laugh, only time will tell. Yet there are those who catapult to success taking big risks in setting up their own businesses, which return the higest amongst all asset classes, and which also generate jobs for the Singapore economy. They usually start with some form of leverage. So leverage in itself is not a bad thing. Rather the use of leverage is what matters. At MortgageWise we are talking about both the smart use of leverage, and the smart way to leverage (when it comes to mortgages). So speak to us today.


Since 2014, has provided thought leadership in the mortgage planning space in Singapore, taking deep dives into the latest trends in the industry, providing useful mortgage tips, and making sense of rate movements. We aim to build trust with clients for longer term partnership and not just do product-pushing for a one-time deal unlike bankers. That’s why we always present “whole-of-market” perspective including packages that banks do not pay us. That’s why many have chosen to work with us in the end notwithstanding the sheer number of brokers and agents out there. See their testimonials.


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With rates staying lower for slightly longer period into 2017 (even if Fed raises rate by Dec 2016) and more uncertainties and headwinds for the Singapore economy with more job losses expected, suddenly the purpose and benefit of MortgageOne – an interest offset account for mortgages by StanChart, has become more substantive.

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What Is An Interest Off-set Account?

The concept iinterest offset mortgage account with stancharts simple – while one still pays the same monthly repayment amount every month, by depositing funds into such an interest-offset account like MortgageOne which is like a savings account, the interest portion of the mortgage payment is being reduced by a matching deposit interest earned on the funds deposited  into the MortgageOne account and hence more of the instalment paid now goes to reducing the principal loan.

The maximum funds that one can deposit into MortgageOne account to earn this matching mortgage interest rate will be capped at the outstanding loan size, and only two-thirds of the funds will earn this special matching interest, the remaining one-third will be earning the normal savings account interest.

How Does MortgageOne Benefit Homeowners?

There are two situations where interest-offset offers benefits, and incidentally the two are at the ends of a continuum in terms of the use of leverage.

First, this applies to those who believe in the use of maximum leverage to create wealth and would seek to fully utilize one’s capacity for debt (within the threshold of TDSR). Many a times successful investment requires patiently holding on to one’s cash and waiting for the right opportunity to get into financial markets especially in times of major market corrections. Timing is everything and when such opportunities arise, investors would want to be “ready to pounce” and not have to waste precious time applying for maximum leverage. MortgageOne would help position such investors for such opportunities. While waiting which could take months or even years an investor will not need to pay higher interest as his existing liquid funds will be earning deposit interest matching that of his mortgage rate, up to 2/3 of his outstanding loan, essentially he is paying down his loan faster.

The second group on the other hand is conservative by nature, does not believe in the use of leverage, and in fact seeks to pay down their outstanding mortgage as quickly as they can. Logically they should take the minimum loan needed and pay down using all their equity be it cash or CPF. The truth is however most of us lie somewhere in between conservatives and risk-taking. It does not make sense to use up one’s cash and put it fully into an illiquid asset like real estate. What most would do in this group, being conversative and risk-averse, is to take additional loan in case of any unforeseen changes to one’s income position later on rendering refinancing or applying for a bigger loan difficult, but in the meantime keep their cash within easy access for rainy days. What better way to do that than MortgageOne? Put that cash back into “reducing” the loan until such time when the additional loan is really needed. Simply withdraw one’s own funds out from one’s MortgageOne account.

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Are There No Other Lenders In Singapore Offering Interest-Offset?

While there are other banks like Citibank, HSBC or UOB that offers interest offset account from time to time, none of them make it into a strategic feature of their mortgage packages. They only offer it sporatically and in fact some requires that homeowners take up a special home loan package which comes with higher spreads in order to enjoy the interest-offset feature. This of course means it comes with a cost to homeowners. On the other hand StanChart has successfully entrenched MortgageOne as one of its core competitive feature of their home loan solutions so much so that the name as almost become synonymous to interest-offset account. Most of their home loan packages would come with MortgageOne.


At MortgageWise, we seek to provide thought leadership in the area of mortgage planning in Singapore, taking deep dive into developments and news on mortgages & helping clients track interest rate movements.  We do not just go for one-time business with clients but rather choose to build long trusting relationships by giving truly independent advice to the extent of losing the deal.  We strive to become the first-choice mortgage partner for homeowners and the creditable distributor of mortgage products for banks and financial institutions in Singapore.


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Buying A Car Using Equity Term Loan On Your Mortgage?

If the value of one’s property that is mortgaged to the bank has gone up over the years, one could then take out more leverage or debt in the form of an equity term loan for various purposes like investment (buying the bank’s stocks as what we have recommended earlier) or even to buy a car instead of taking a conventional car loan on hire purchase.

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Equity term loan (ETL) is only for private properties and not HDB. This is one reason put forth by some property investment gurus why a private property makes a better investment property rather than a HDB even though the latter almost always fetch a higher cap rate (capitalization rate or yield). One does not need to sell away the investment property to “unlock” its value but rather just take “cash out” when the value appreciates, or some bankers will call it “gear up”, in the form of a term loan. Such term loan (in short) is amortized in the same manner as the housing loan but usually on different interest as most borrowers take up the term loan at a later stage. When there is a term loan on top of a housing loan, banks can still take over both loans during refinancing in the same manner – splitting into two parts and taking over housing loan and term loan separately but applying the same interest rate package. The two cannot be combined as only the first loan taken on a new property is considered a housing loan, all subsequent loans taken on the same property will be considered ETLs which carry a higher risk to the bank. Let me explain why.

We often say that term loan is a 5th charge loan – behind that of housing loan and CPF amounts used, in the event of a default or foreclosure. Should the borrower be unable to service the loan and the bank foreclose and auction off the subject property, all sales proceeds will be paid out in the following sequence:

1st Charge:

Outstanding housing loan (Bank or HDB)

2nd Charge:

CPF principal sum used up to 100% of Valuation Limit plus whatever amount that has been used for legal fees, stamp duty & survey fees

3rd Charge (pari passu or equal ranking):

CPF principal sum beyond 100% of Valuation Limit and CPF accrued interest;

Outstanding housing loan interests

4th Charge (pari passu or equal ranking):

CPF Board’s legal costs and expenses;

Bank’s legal costs and expenses

5th Charge:

Any other monies owing to the bank under the mortgage like equity term loan

For an even clearer idea refer to the Terms and Conditions on the use of CPF savings under CPF Residential Properties Scheme on the CPF website. The relevant extract is reproduced here for your easy reference.

5th charge loan for term loan

As term loan is a 5th charge loan, it carries more risk for the bank and hence it will less out the CPF used to- date in calculating the maximum term loan available to a borrower, using the formula 80% of valuation less CPF used to-date less outstanding housing loan. Do note that however different banks may have different practices when it comes to the maximum term loan allowed depending on their own credit policy, and factors like whether this is the only housing loan for the borrower or there are multiple mortgages, foreigner versus local etc. If you are looking to gear up, we suggest you speak to one of our experienced mortgage consultant to find out more.

At MortgageWise, we seek to provide thought leadership in the area of mortgage planning in Singapore, taking deep dive into developments and news on mortgages & helping clients track interest rate movements.  We do not just go for one-time business with clients but rather choose to build long trusting relationships by giving truly independent advice to the extent of losing the deal.  We strive to become the first-choice mortgage partner for homeowners and the creditable distributor of mortgage products for banks and financial institutions in Singapore.


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