Thirteen people on board a skydiving plane that encountered engine trouble have parachuted to safety on New Zealand's North Island moments before the aircraft plunged into a lake.

Skydive Taupo chief executive Roy Clements said the plane, which was heading for a tandem skydive over Lake Taupo, experienced an engine problem shortly after take-off about 12:00pm on Wednesday local time.

Despite jumping for their lives thousands of feet below the recommended level for a tandem jump, the skydivers descended safely - some into water, others onto land.

"It was nothing short of a miracle," Mr Clements said.

The downed skydiving plane in Lake Taupo. ( Supplied: 3News )

He praised the pilot for his quick thinking.

"He had to deal with the worst nightmare really for a pilot - what appears to be an engine failure," he told local news service Sun Media.

"As a result he's told everyone to get out of the plane, and he's followed his own advice."

The engine failed at about 600 metres, well below the intended jump altitude of about 10,000 feet.

"It's a lot lower than we would want to be; the minimum activation for a tandem parachute is 5,000 feet," Mr Clements said.

Plane 'nose dived into lake'

Witness Sue Stubbs said she saw the engine stop and the plane glide "for a while".

"Within [what] must have just been seconds I thought maybe half a dozen skydivers jumped out, parachutes open," she said.

"With that the plane glided on a little bit further and did a big loop around land area and then nose dived into the lake."

One witness told TVNZ One News she watched as the plane plummeted towards the water.

"I saw the pink plane coming across and smoke coming out of it, then saw the plane [and] the parachutists jumping out of it," she said.

"And then I heard a big bang ... it blew up before it hit the water."

She said the pilot landed in prickle bushes and had to wait for the fire brigade to arrive before they could be "cut" out.

Bevan Johnhill told New Zealand's TV3 network he thought the pilot "must have been the last one to get out".

Another witness told TVNZ people on nearby boats scrambled within minutes to pick up the skydivers.

"People just rushed out to them, even if they had to launch their boats from their holiday homes," she said.

Ambulance staff checked over the 13 people.

Investigation under way, expected to take 18 months

New Zealand's Civil Aviation Authority spokesman Mike Richards said an investigation was under way.

The Transport Accident Investigation Commission said it had opened an inquiry into the accident.

It said three investigators had travelled to Taupo to commence inquiries focussing firstly on securing evidence including the wreckage, aircraft and flight information, and gathering initial accounts from those involved as well as from witnesses.

A fourth investigator will work from Wellington.

Police divers will assist the commission's investigators with an underwater inspection and photography of the wreckage before it is lifted from Lake Taupo by commercial salvage experts.

The inquiry is expected to take 18 months, but the Commission said it had the ability to issue interim reports or safety recommendations before the completion of the inquiry if necessary.

ABC/AFP