diff --git a/Source/Engine/ContentImporters/ImportModel.cpp b/Source/Engine/ContentImporters/ImportModel.cpp
index baac1defb..b6fd483d3 100644
--- a/Source/Engine/ContentImporters/ImportModel.cpp
+++ b/Source/Engine/ContentImporters/ImportModel.cpp
@@ -665,7 +665,9 @@ CreateAssetResult ImportModel::CreatePrefab(CreateAssetContext& context, ModelDa
         // Setup node in hierarchy
         nodeToActor.Add(nodeIndex, nodeActor);
         nodeActor->SetName(node.Name);
-        nodeActor->SetLocalTransform(node.LocalTransform);
+
+        // Only set translation, since scale and rotation is applied earlier.
+        nodeActor->SetLocalTransform(Transform(node.LocalTransform.Translation));
         if (nodeIndex == 0)
         {
             // Special case for root actor to link any unlinked nodes
diff --git a/Source/Engine/Tools/ModelTool/ModelTool.cpp b/Source/Engine/Tools/ModelTool/ModelTool.cpp
index e2b2f5d8d..ac9cda8b6 100644
--- a/Source/Engine/Tools/ModelTool/ModelTool.cpp
+++ b/Source/Engine/Tools/ModelTool/ModelTool.cpp
@@ -1292,7 +1292,7 @@ bool ModelTool::ImportModel(const String& path, ModelData& data, Options& option
         !
 #endif
     }
-    if (EnumHasAnyFlags(options.ImportTypes, ImportDataTypes::Geometry) && options.Type != ModelType::Prefab)
+    if (EnumHasAnyFlags(options.ImportTypes, ImportDataTypes::Geometry))
     {
         // Perform simple nodes mapping to single node (will transform meshes to model local space)
         SkeletonMapping<ModelDataNode> skeletonMapping(data.Nodes, nullptr);
@@ -1312,7 +1312,13 @@ bool ModelTool::ImportModel(const String& path, ModelData& data, Options& option
                 if (skeletonMapping.SourceToSource[mesh.NodeIndex] != mesh.NodeIndex)
                 {
                     // Transform vertices
-                    const auto transformationMatrix = hierarchyUpdater.CombineMatricesFromNodeIndices(skeletonMapping.SourceToSource[mesh.NodeIndex], mesh.NodeIndex);
+                    auto transformationMatrix = hierarchyUpdater.CombineMatricesFromNodeIndices(skeletonMapping.SourceToSource[mesh.NodeIndex], mesh.NodeIndex);
+                    if (options.Type == ModelType::Prefab)
+                    {
+                        // Cancel out translation during mesh transformation, to set translation during prefab generation time.
+                        transformationMatrix = transformationMatrix * transformationMatrix.Translation(transformationMatrix.GetTranslation() * -1.0f);
+                    }
+
                     if (!transformationMatrix.IsIdentity())
                         mesh.TransformBuffer(transformationMatrix);
                 }