The Bournemouth fighter, competing in his hometown, had been expected to be too sharp for the experienced Masternak, who was participating in his 53rd bout as a professional.
However, it was the 36-year-old Pole who controlled much of the contest, only for a broken rib leading his corner to pull him out of the fight at the start of the eighth round.
Billam-Smith had dethroned Lawrence Okolie in his last outing in May and the manner of that victory had made him a huge favourite for the clash on Sunday.
While he may have taken the opener, Masternak landed numerous significant shots in each of the following rounds, with Billam-Smith suffering the consequences of attempting big blows rather than boxing to a plan.
Although Billam-Smith rarely looked in considerable trouble, with the accumulation of heavy shots from Masternak could have taken their toll in the second half of the fight.
Instead, an assault to the body in the seventh made an unlikely breakthrough, with the damage being visibe as Masternak was reluctantly pulled out of the fight when he was ahead on the scorecards.
Richard Riakporhe is now expected to be Billam-Smith's next opponent at some point in the spring, with Riakporhe having defeated Billam-Smith via split-decision earlier in their career.