Question: When I chose New from the Template panel in the Post settings I saw a Create a custom template dialog. What’s a Custom template and what does it contain as default?
Answer: A custom template is one that overrides the default template for the selected post, page or query.
The Create a custom template dialog creates a new template in the database.
WordPress supports a variety of Custom templates. Some of them were originally created to be unique to a particular page, others could be assigned depending on the post type. Full Site Editing allows you to choose the template to be assigned to a particular post. How you use/misuse this freedom is up to you.
Page template hierarchy
|Template name format||Example||Usage|
|$custom||featured-image-left||Displays the featured image to the left|
|page-$slug||page-template-hierarchy||Template specifically for the template-hierarchy page|
|page-$id||page-2||Template specifically for page ID 2|
|page||Sitemap||Default for the Page post type|
|singular||n/a||Fallback for pages|
|index||Fallback for everything|
See Template hierarchy for the full hierarchy.
Additional note from Ann McCarthy
If you switch themes, these custom templates are lost and it would be good to highlight that: https://github.com/WordPress/gutenberg/issues/31954