Joakim Tjernell was pretty proud of himself—he’d done a damn good job of shopping for a mortgage. It was back in June of 2009 and Tjernell, a 32-year old translator, had been eyeing units in a slick modern condo building on Toronto’s Bathurst Street for a while. There was a lot of paperwork—Tjernell’s wife is a freelance graphic designer, so they had to prove that she had regular income. “This was the first time we had a mortgage, so we were nervous about getting approved,” he recalls.

But not only were they approved, their mortgage broker came through with a great offer on a variable-rate mortgage from Scotiabank. The $280,000 loan had a 25-year amortization and a floating rate of just 2.90% to start. Tjernell was sure he’d bagged a deal.

But last May he got an email newsletter from his broker suggesting that he could do even better. Tjernell thought that all variable-rate mortgages were the same, but that wasn’t the case. His original mortgage offered a rate of prime plus 40 basis points (there are 100 basis points in one percentage point). But the newsletter was offering variable-rate mortgages at prime minus 40 basis points. Was a difference of just 0.8 of a percentage point worth switching for?

When his mortgage broker ran the numbers he found out it was. Breaking his old mortgage to switch to the new one could mean a savings of more than $5,000 in interest payments over the life of Tjernell’s mortgage—enough for a couple of nice vacations down south for him and his wife. “As soon as I realized that, I paid the $1,800 penalty, and kept the amortization period the same at 25 years,” he says. “I’m now saving $150 a month on my payments.”

If you’ve been watching rates lately, you may be wondering if you could break your mortgage to save a pile of cash too. Variable rates hit rock bottom just over a year ago at 2.25% and they’ve only risen slightly, to 3.00%, since then. The current five-year fixed rate is also a steal—it’s at 3.39%, close to its all-time low (all rates were accurate as of mid-November). Breaking your existing mortgage to switch to a lower rate could save you hundreds of dollars every month—or knock years off the length of your mortgage so you own your home sooner.

But you have to be careful. Your mortgage is probably the most complex contract you’ve ever signed. Make a wrong move and you’ll end up on the hook for penalties of $20,000 or more. The key is to run the numbers and get some advice before you approach your lender. Luckily, a quick analysis to see if you’ll come out ahead is relatively painless and free. Read on, and we’ll show you how to do it.

What’s your ultimate goal?
Your first step is to decide what you want to accomplish. Most people are looking to accomplish one of three things: they want to reduce the total cost of their mortgage, they want to consolidate other debt (such as credit card debt) into their mortgage, or they want to reduce their monthly payments, whatever the cost.

You should be clear about what your goal is, because it will have a big impact on how you proceed. We’ll deal with the first situation first—lowering the total long-term cost of your mortgage—then look at the other two situations a bit later. Keep in mind that lowering the cost of your mortgage can be done in two different ways. You can keep the total length of the mortgage—called the amortization period—the same and reduce each monthly payment. Or you can keep your monthly payments the same, and shave years off your amortization period so you’ll own your home outright sooner. Either way, you could save a pile of money.

When is it worth breaking your mortgage?
The rule used to be that it’s worth breaking your mortgage when you can get a new rate that’s at least two percentage points lower than your current one. But that’s all changed. Because the rates are so low now, it’s worth switching for a much smaller drop. For instance, if you had a five-year fixed mortgage at 5.0% you might be eyeing the current rate of about 3.39%. That’s a difference of less than two percentage points, but it actually means reducing your rate by more than a quarter, which could translate into reducing each monthly payment by 30%. If you were paying $1,500 a month before, you’d save about $450 each and every month. Most homeowners would agree that’s definitely worth switching for.

Because each percentage point drop represents a bigger proportion of the total rate, the new rule is that if you see a rate that’s just 30 basis points lower than your current rate, it’s worth running the numbers. Depending on the penalty for breaking your existing mortgage, you could see big savings.

Are you allowed to break your mortgage?
In most cases the answer is yes. When you signed your mortgage document, you agreed to a whole slew of conditions, and one of them was likely a penalty for exiting your payment schedule before the current term is up (most terms are one, three or five years in length).

It doesn’t matter whether you do it by paying the whole mortgage off in cash, or by switching to a new mortgage—if you depart from the repayment schedule you agreed to before the term is up, you’re breaking your mortgage. Your lender will get less in interest payments out of you than you initially agreed to, so there will usually be a penalty. “When people buy a home they’re not thinking of breaking their mortgage,” says Vince Gaetano, principal mortgage broker with MonsterMortgage.ca in Toronto. “But the reality is that almost 40% of mortgage-holders will have to refinance and when they do, they’ll have to deal with their penalty.”

In other words, the question you should ask yourself isn’t “Am I allowed to break my mortgage?” it’s more like: “How much is breaking the mortgage going to cost me?”