The incident occurred on Southern Cross Avenue at North Haven shortly after midnight, with strong winds exacerbating the situation.
The family of four managed to escape their home as the fire rapidly spread, and were taken to hospital for treatment of smoke inhalation.
Neighbours reported they also prepared to evacuate their own properties, fearing the fire would spread due to the prevailing wind conditions.
Metropolitan Fire Service crews responded to the blaze, working to contain the flames.
“The garage was fully involved with fire, crews got to work trying to extinguish that quite quickly, we believe that was being used as a bedroom and the fire started in that area,” MFS firefighter Phil Ross said.
Crews remained at the scene for four hours after the fire was extinguished, monitoring for potential flare-ups.
The damage bill is estimated to be around $800,000, leaving the family with a big clean-up effort – although they are insured.