The plane that crashed was operated by Skydive Taupo.
The company's chief executive, Roy Clements, told Hawke's Bay Today there had been six tandem pairs in the plane.
"All the instructors live in Taupo. All the six customers were foreign ..." He also said the plane had "encountered an engine problem shortly after take-off".
A witness, who did not want to be named, said the plane "conked out" off Waitahanui, a small village on the southern side of the lake, before going into Rotongaio Bay.
A police boat and recreational boaties responded to the rescue effort. The wreckage of the bright pink plane was reportedly sunk in 3.5m of water and left a trail of debris.
A police spokeswoman said Victim Support had been notified and Skydive Taupo was supporting the crew and passengers.
Taupo Mayor David Trewavas said the pilot of the skydiving plane lost power about 1300m off the ground and realised those aboard needed to bail out. He said the pilot and others onboard should be praised for the way they handled the situation.
Taupo hosted the highest number of parachute jumps in the southern hemisphere and was a "very large tourism activity" in the area carried out by "very experienced operators".
Civil Aviation Authority (CAA) spokesman Mike Richards said it was "miraculous" no one was killed and a safety investigation team was reviewing the incident.
The Transport Accident Investigation Commission (TAIC) has also opened an inquiry into the incident. It would focus first on securing evidence including the wreckage, aircraft and flight information, and gathering accounts from those involved as well as witnesses, the TAIC said.
Police divers would assist the commission's investigators with underwater inspection and photography of the wreckage before it was lifted from the lake bed by commercial salvage experts. The inquiry would focus on identifying what occurred and why, the TAIC said, as well as any lessons or recommendations which could be taken from the crash to prevent similar incidents in the future.
A full inquiry could take up to 18 months.
Additional reporting
by NZ Herald staff