Church Debt #2

My previous post was a primer on church debt. In this post, I want to focus on the interest rates that churches pay. There is a simple way for churches to pay less in interest and use that money for staffing, buildings, programming, or additional payments on the principal.

First, indicators that you should refinance:

  • If a church has an interest rate that is more than 1% over the current market rate, then refinance
  • If the church’s current terms are less than 12 months from renewal, then refinance
  • If the church needs additional capital for a project AND the church’s debt-to-budget ratio is less than 200%, then refinance and include the additional amount in the new mortgage

One of the biggest questions facing church finance committees on the subject of refinancing is whether to get a fixed or floating rate interest note.

  • A fixed-interest-rate note is just that: for the life of the loan, you’ll always pay the same interest rate. It is easy to budget for this and there is a measure of certainty and even security in knowing exactly what the monthly mortgage bill will be. This is a good tool for small amounts.
  • A floating-interest-rate note is pegged to one of two interest rates: US Prime Rate (set by the US Federal Reserve and major US banks) and LIBOR (an acronym for the London Inter-Bank Offered Rate and is set in London as a basis for international loans). Floating rates can be either higher or lower than fixed rates – it is all dependent on the financial world. note that many banks will allow floating rates to be changed to a fixed rate at some time during the five year period.

No one knows what the interest rates will do over the next five years, yet that is exactly what finance committees are trying to guess. Do they lock in a fixed rate for five years to have a stable figure for the budget, or do they try to pay less with a floating rate knowing that if they’re wrong, the floating rate could go sky high before they can lock it in? Here’s my suggestion as to which interest rate tool a church should use: BOTH.

Instead of trying to guess either/or, do both/and. The church should take its current loan and get the bank to finance half in a fixed-rate note and half in a floating-rate note. Each month the church will make its regular principal and interest payments from its budget and capital campaign receipts. Then, as the church receives additional gifts toward the debt, the church will make additional principal payments against whichever note has the highest interest rate (fixed or floating). This is important – you want to first knock down the debt of whatever note has the highest interest rate. This may change during the course of the debt: the floating rate may go higher than the fixed or vice versa, but you always want to pay down whichever note has the highest rate, not the one with the highest debt.

This is a simple concept which may take your bank a while to accept, because it is not to their advantage. But this is God’s money – use it to the church’s advantage!

Interest Rate Hedges or Insurance: The financial world has come up with many tools to decrease the perceived risk in interest rates. My experience is that these are usually balanced in favor of the bank and they are not worth the extra cost to the church.


Lead On!