Turkey is one of the top five countries for geothermal direct applications. However, in the space heating applications, a considerable amount of geothermal energy is wasted through the low thermal quality building envelopes. In the present study, the residential buildings in Gonen geothermal district heating system (GDHS) have been investigated to analyze their energy performance. The optimum insulation thicknesses of the building components, energy savings and payback periods were calculated for the four different insulation materials applied commonly on the building components. The optimization was based on the life-cycle cost analysis and the calculations were also extended to include coal and natural gas considering their wide usage for heating in the rest of the buildings in Gonen. The results proved that depending on the type of the energy and the insulation material optimum insulation thickness of the external walls, ceilings and floors varied between 2.2–12.2, 5.5–13.3 and 3.6–7.6 cm, respectively. In case of using optimum insulation thicknesses for all Gonen GDHS buildings the highest annual savings and the shortest payback periods for external walls, ceilings and floors were calculated as 1,926,454, 1,455,785 and 520,248 US$; 1.83, 1.23, and 1.44 years, respectively. ► Thermal qualities of structural components analysed in Gonen GDHS buildings. ► Different types of fuels and insulation materials were selected for the analyses. ► Optimum insulation thicknesses, energy savings and payback periods were determined. ► Optimum thickness for external walls is between 2.2 and 12.2 cm. ► While for ceilings and floors between 5.5–13.3 and 3.6–7.6 cm, respectively.