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Here are the three ways to repay a loan:

Capital & interest

Making regular payments of the principal and interest over a fixed tern is the most common way of repaying a loan.  This is called amortization or repayment mortgage.  Amortizations may be short or long depending on the size of the loan as well as the prevailing custom in the country.  A capital element and an interest element comprsies a mortgage repayment.  Throughout the life of the mortgage, there is a difference in the cost of capital included in each resettlement.  During the initial years, the repayments are largely interest and partly capital.  As the mortgage nears its completion, the resettlement becomes largely capital and partly interest.  The repayment cost is computed at the outset in order that the loan is returned at a set period in the future.  This assures that by continuing repayment the loan will definitely be paid out at a specified period.

Interest only

In an interest only mortgage, the capital is not returned throughout the period of the mortgage.  In the UK interest only mortgages are related with regular investment plans.  In this type of mortgage, contributions are regularly given to a separate investment plan which increases a lump sum in order to repay the mortage when the plan matures.  Historically investment-backed mortgages are more advantageous over repayment mortgages although this has changed particularly in the UK.  There is a higher-risk on investment-backed mortgages since it relies on the suffficiency of the investment to pay out the debt.

Commonly, a repayment vehicle is arranged together with interest only mortgage because the borrower gambles on the assumption that the property will gain sufficiently for the loan to be paid out.
No capital or interest

In the case of older borrowers, a mortgage where neither the capital or interest is repaid may be set-up.  The interest rolls up when the capital increases the debt every year.
The loans are not returned until the death of the borrower which explains the restriction in the age.

Interest and partial capital

A loan in which the monthly amortization is calculated over a certain period and the outstanding balance of the capital is paid at a time short of that period is called a balloon loan. When the mortgage is arranged on the basis of capital and interest, this is called a repayment mortgage and is common in the United Kingom.

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