This paper reports on a new method for compensation of machine tool thermal errors that is based on system of thermal transfer functions. Due to their relative simplicity they enable real-time calculations which make them suitable for compensation algorithms of thermal displacements at tool centre point. The applicability and robustness of the thermal transfer function compensation model have been experimentally verified on a real machine tool. Tested compensation algorithms proved its ability to significantly reduce thermal errors. The thermal error minimization of more than 85 % of the standard compensation technique based on linear regression model was achieved in particular machine tool coordinate direction.