diff --git a/pkg/limatmpl/abs.go b/pkg/limatmpl/abs.go
index 2598b377c5f..bfc7060e9e5 100644
--- a/pkg/limatmpl/abs.go
+++ b/pkg/limatmpl/abs.go
@@ -11,6 +11,8 @@ import (
 	"path/filepath"
 	"runtime"
 	"strings"
+
+	"github.com/lima-vm/lima/v2/pkg/localpathutil"
 )
 
 // UseAbsLocators will replace all relative template locators with absolute ones, so this template
@@ -105,6 +107,13 @@ func absPath(locator, basePath string) (string, error) {
 	if err == nil && len(u.Scheme) > 1 {
 		return locator, nil
 	}
+	// Don't expand relative path to absolute. Tilde paths however are absolute paths already.
+	if localpathutil.IsTildePath(locator) {
+		locator, err = localpathutil.Expand(locator)
+		if err != nil {
+			return "", err
+		}
+	}
 	// Check for rooted locator; filepath.IsAbs() returns false on Windows when the volume name is missing
 	volumeLen := len(filepath.VolumeName(locator))
 	if locator[volumeLen] != '/' && locator[volumeLen] != filepath.Separator {
diff --git a/pkg/limatmpl/abs_test.go b/pkg/limatmpl/abs_test.go
index fbf7c19bca4..5b78e9c155b 100644
--- a/pkg/limatmpl/abs_test.go
+++ b/pkg/limatmpl/abs_test.go
@@ -4,6 +4,7 @@
 package limatmpl
 
 import (
+	"os"
 	"path/filepath"
 	"runtime"
 	"strings"
@@ -205,6 +206,15 @@ func TestAbsPath(t *testing.T) {
 		assert.Equal(t, actual, filepath.Clean(volume+"/foo"))
 	})
 
+	t.Run("If the locator starts with ~/, then it will be expanded to an absolute path", func(t *testing.T) {
+		actual, err := absPath("~/foo", volume+"/root")
+		assert.NilError(t, err)
+		homeDir, err := os.UserHomeDir()
+		assert.NilError(t, err)
+		// homeDir already includes the volume
+		assert.Equal(t, actual, filepath.Join(homeDir, "foo"))
+	})
+
 	t.Run("", func(t *testing.T) {
 		actual, err := absPath("template://foo", volume+"/root")
 		assert.NilError(t, err)
diff --git a/pkg/localpathutil/localpathutil.go b/pkg/localpathutil/localpathutil.go
index 3081763b159..baa4ceb1f71 100644
--- a/pkg/localpathutil/localpathutil.go
+++ b/pkg/localpathutil/localpathutil.go
@@ -11,6 +11,12 @@ import (
 	"strings"
 )
 
+// IsTildePath returns true if the path is "~" or starts with "~/".
+// This means Expand() can expand it with the home directory.
+func IsTildePath(path string) bool {
+	return path == "~" || strings.HasPrefix(path, "~/")
+}
+
 // Expand expands a path like "~", "~/", "~/foo".
 // Paths like "~foo/bar" are unsupported.
 //
@@ -20,13 +26,13 @@ func Expand(orig string) (string, error) {
 	if s == "" {
 		return "", errors.New("empty path")
 	}
-	homeDir, err := os.UserHomeDir()
-	if err != nil {
-		return "", err
-	}
 
 	if strings.HasPrefix(s, "~") {
-		if s == "~" || strings.HasPrefix(s, "~/") {
+		if IsTildePath(s) {
+			homeDir, err := os.UserHomeDir()
+			if err != nil {
+				return "", err
+			}
 			s = strings.Replace(s, "~", homeDir, 1)
 		} else {
 			// Paths like "~foo/bar" are unsupported.