The defender, a product of Villa's youth academy, was promoted to the first-team squad last summer following the appointment of Paul Lambert, and went on to make 30 appearances in all competitions.
Baker is delighted to be continuing his progression at Villa Park, committing his long-term future to the club, and is excited by the potential of Villa's young side.
"I'm really happy to have signed and for my future to be with Villa," Baker told the club's official website.
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"We were probably one of the youngest squads in the Premier League last season and we felt that we got stronger and stronger as the season went on. Hopefully, next season we can keep improving and we can be even better. I think things are in place that we can really do that.
"As a team, we really grew over the course of the season. We're going to keep growing and the competition for places will ensure that. There's still ways we can improve as players and as a team and there's a lot of potential here.
"If we play next season the way we ended the one just gone, we believe we can push up the table and surprise some people."
Villa boss Lambert echoed Baker's sentiments regarding progression, and has faith that the 22-year-old will continue to improve after contributing massively to the club's Premier League survival push last season.
"For any player here at Aston Villa, the goal is always to strive to be the best you can and to keep improving as an individual within the team," Lambert said.
"Nathan has demonstrated courage and real willing and he's contributed to the team and these qualities will underpin his efforts going into the new season."