Laser interferometer technology is used in the precision positioning stage as an encoder. For better resolution, laser interferometers usually work with interpolation devices. According to the interpolation factor, these devices can convert an orthogonal sinusoidal signal into several square-wave signals via digital processing. The bandwidth of the processing will be the limitation of the moving speed of the positioning stage. Therefore, the user needs to make a trade-off between the interpolation factor and the moving speed. In this investigation, a novel analog interpolation method for a heterodyne laser interferometer has been proposed. This method is based on the principle of the lock-in amplifier (LIA). By using the proposed interpolation method, the bandwidth of the laser encoder system can be independent of the interpolation factor. This will be a significant benefit for the ultra-high resolution encoder system and the laser interferometers. The concept, design, and experiment are revealed in this manuscript. The experimental results show that the proposed interpolation method can reach nanometer resolution with a heterodyne laser interferometer, and the bandwidth of the signal is independent of the resolution.