The final election night count gave Mr Peters 15,359 votes to Mr Osborne's 11,347.
Labour's Willow Jean Prime got 1315 - well down on the 9000 she got last September as Labour voters clearly voted strategically for Mr Peters instead.
The mood was jubilant at the NZ First campaign night headquarters, the Duke of Marlborough Hotel in Russell. Among those celebrating were former Labour MPs Dover Samuels and Shane Jones.
Mr Jones' decision to attend Mr Peters' event rather than Labour's will add to speculation he may consider a return to Parliament with NZ First.
The National Party had mounted a massive campaign effort, shipping in ministers almost daily. It also put in a big push in the final few days with a mercy dash by the Prime Minister, and phone canvassing and door knocking to get the voters out.
However, appears to have been to no avail - Mr Peters and his Force for the North bus steamrolled National's massive party machine, completely demolishing the 9000 vote majority former MP Mike Sabin won in the election just six months ago.
Labour leader Andrew Little, at a function at the Klondike Tavern in Kawakawa, said the result showed Northland was "sending a message to this government after years of neglect of the regions".
The byelection was prompted by the resignation of Mr Sabin on January 30. That was one of the factors that bedevilled National throughout the campaign as Mr Peters demanded they answer questions as to how much ministers had known about the situation.
Mr Peters' other campaign messages also appeared to resonate with voters. He focussed on claiming Northland was neglected for decades by National and it was time to "send them a message".
National struggled to get their counter-message through to Northlanders against that. On the final day of campaigning, Key had said he still believed Osborne could pull it off if National's voters turned out.
However, reality appeared to set in on Friday - Key was already attempting to justify a loss and claiming a byelection reflected local issues rather than a wider dissatisfaction with National's government. Steven Joyce, National's campaign manager, also pointed to the low recognition factor Osborne had compared to Mr Peters.
Election night results:
Adrian Paul BONNER (independent) 17
Joe CARR (Focus NZ) 107
Robin GRIEVE (ACT) 66
Maki HERBERT (Aotearoa Legalise Cannabis) 85
Adam HOLLAND (independent) 14
Mark OSBORNE (National) 11,347
Rob PAINTING (Climate Change) 38
Winston PETERS (NZ First) 15,359
Rueben Taipari PORTER (Mana) 55
Willow-Jean PRIME (Labour) 1,315
Bruce ROGAN (independent) 22