The entire district's firefighting resources were used to quench the fast-moving fire, and seven houses in the area were evacuated as a precaution.
"Would have been quite a freaky thing to wake up to at four o'clock in the morning,'' Mr Grace said.
The fire was extinguished after about two hours by up to 50 firefighters from Wanaka, Lake Hawea, Luggate and the Department of Conservation brigades.
Wanaka Volunteer Fire Brigade chief fire officer Bruno Galloway said the brigades had achieved a "good save".
Their first priority was to save a house low on the slopes of Mt Iron, near the seat of the fire.
"When we got here it (the fire) was here in front [of the house), and a bit of wind blowing. That was our priority to protect the house and it wasn't until the crews from Luggate and Hawea got here that we could start fighting the fire," Mr Galloway said.
Fire brigades have been warning about tinder dry conditions. A district-wide prohibited fire ban begins at midnight tonight.
"It was worrying for everyone. It is extremely dry. We were lucky we could save it when we did," Mr Galloway said.
Mr Grace said the area would be monitored today.
"(There are) very strong north-west winds so they're worried that it could flair up again. There will be someone keeping an eye on the area during the day and I'm sure people around the area will also be watching it," he said.
Doc firefighters helped because the fire was within 1km to the heavily vegetated Mt Iron Recreational Reserve.
There were very real concerns the fire could have spread into the reserve.
Many residents spoken to said they had self-evacuated because they realised they had to act quickly.
Some had got up to go to the bathroom, others were getting a drink or closing banging windows when they noticed the fire.
Several emergency calls were made and Radio Wanaka made an very early broadcast announcement.
Neighbours went and knocked on each others doors to raise the alarm and friends from other parts of town arrived in vehicles ready to help, if needed.
Many grabbed pets, photographs and passports, while others turned on their garden sprinklers or hosed down firewood piles.
St John Ambulance and police also attended. No major injuries or accidents were reported.
Some residents reported their cats had run away from home.
Bevan St resident Mary-Lou Roulston said the fire was "absolutely terrifying'' and reinforced how unprepared people are for an emergency.
"When you are at your kitchen window and see flames leaping over the fence, all you can think of is those poor people in Australia. You start to look around the house at things you want to take and you have no idea. I've got the computer and the photos ... It is just immense panic,'' Mrs Roulston said.
Wanaka resident Ed Taylor said the fire came right up to back fences and there were some "very worried residents".
"It was just so lucky that the winds pushed it (the fire) away into the scrub. It was a miracle no houses were lost or anyone was injured."
It was not known what caused the fire at this stage, but it would be investigated.
