The Milton Fire Brigade was called to the Dryden St house about 9.20am and soon after, corrections officer Ash Prasad was also alerted to the fire by his colleagues at the Milburn prison.
Mr Prasad said his initial concern was for a woman who had taken up tenancy of the house on Monday, but she was later found safe in Invercargill.
A neighbour, Trish Norman, said flames were "shooting" out of the windows of the burning house and smoke was everywhere.
Mr Prasad was pleased no-one was injured but was left wondering why someone would try to burn his house down.
"I'm hoping it's not gang-related. Always, when you're a corrections officer, you do wonder."
Southern Region Fire Safety Officer Mike Cahill, of Invercargill, said the fire had been deliberately lit, and the case was now in the hands of Balclutha police.
Detective Constable Craig Dinnissen, of Balclutha, did not believe the incident was gang-related, but could not say whether the fire was malicious or mischievous.
Investigations were continuing.
Milton Fire Brigade Deputy Chief Fire Officer Robbie Phillips said the fire appeared to have started in the lounge area at the rear of the house, and had caused major smoke damage to most of the house.
Det Const Dinnissen said anyone who had noticed suspicious activity in Dryden St during the past few days should contact National Crimestoppers on 0800-555-111.
