The six passengers and two crew were rescued after nearby boats came to the aid of the stricken vessel 7.5 nautical miles south-east of Cape Nelson.

The $130,000 Portland-based charter boat, Blue Fin II, was destroyed in the blaze. It sunk in about 80 metres of water.

The passengers, all from Melbourne, and the two Portland crew were not injured and were taken back to the harbour by the Game On and Sharkmen's Viking 3 boats which came to the aid.

Portland coastguard flotilla commander Stephen Brown said his volunteers responded to the incident at 2.47pm after Victorian Water Police notified them of a fire on board a vessel off the coast.

"The skipper of the stricken vessel had deployed his life raft after setting off their EPIRB and had instructed his passengers to abandon ship into the life raft," Mr Brown said.

Game On's skipper rushed to the rescue after seeing the vessel on fire and then notified the coast guard that he had taken six people on board from the life raft.

Viking 3 then reported the exact position of the vessel and took the two crew on board.

The coastguard's rescue vessel came alongside Viking 3 at 3.30pm to confirm all passengers were safe and had no injuries.

Mr Brown said the coastguard took the life raft on board and with help from another charter boat, Adamas 3, unsuccessfully attempted to tow the stricken boat back to shore before it sunk.

"Fire on board vessels are extremely dangerous as the people can not move away from it quickly and (there is) the added factor of fuel explosion.

"The quick-thinking actions of the three charter vessel skippers ensured no loss of life."

He described it as "a good result from a bad situation".

Sergeant Martin Flannery of Portland police said the fire was believed to have started in the engine area.

The crew deployed fire suppression equipment to extinguish it but the skipper became increasingly concerned when it started to smoke and made the decision to abandon ship.

He said police took statements from the crew and passengers at the Portland boat ramp but any follow-up work would be handled by the water police.