Flatmates Chris Snalam, Alex Dale and Sarah Gardiner lost nearly all of their personal belongings and have been left shocked by their close call.
The flatmates were watching a DVD with four friends in an upstairs lounge area when a downstairs smoke detector sounded about 9pm.
The group discovered fire in the garage directly under the living area.
Within minutes, flames and smoke surged through the house, forcing the occupants to flee.
Mr Snalam said he felt powerless when confronted by the fire.
"At first, I thought we might be able to get a hose on it and bring it under control, but it just took off. Within seconds, it spread across the roof of the garage and I started yelling at people to get out," he said.
The inferno blew out windows and a sheet metal garage door off its hinges.
By the time a contingent of 20 firefighters and two appliances arrived, the house and its contents were engulfed by flames.
The fire was brought under control by the Wanaka fire brigade by about 10pm.
Fire safety officer Stu Ide arrived from Dunedin yesterday morning to conduct an investigation into the cause of the fire.
The three flatmates are staying with friends in Wanaka.
The owners of the house live in Dunedin and have been contacted by the property's rental manager, Wanaka Accommodation.
The property was a former family holiday home and the garage contained many items in storage which belong to the owners.
The owners and their insurers are expected to visit the gutted property within the next few days.
Mr Dale is the only tenant of the property who has contents insurance.
The flatmates spent yesterday morning sifting through the charred remains of their bedrooms for salvageable items.
Mr Dale said they were assessing what to do.
An appeal has been launched by a Wanaka radio station and Mr Snalam said the group had been contacted by Wanaka residents with offers of assistance.
