Finally had some spare time coinciding with good weather to swap over my current steel wheels (195/65/R15, 6J ET47) for the 2nd hand alloys I bought from ebay (205/55/R16, 7J ET42). Being the first time I've done this, I noticed something odd and wanted to double-check with you guys.

I started on the rear nearside and once this one was swapped, I noticed that the tyre-wheelarch gap looked enormous. I checked with a ruler and sure enough the gap was much higher than the rear offside which still had the steel wheel. I had to put the steel and the alloy side by side to convince myself I hadn't made a gaff regarding wheel/tyre specs.

Is this a question of the suspension relaxing while the car was jacked up and now needs to settle? If this is the case, can I go ahead and swap the other 3 wheels over, then drive as normal while the suspension settles?

Yes.

Don't feel bad. I had exactly the same when I first swapped wheels rear to front and had both wheels off the ground at the same time.

Did make a rather large gap until I had driven it a few miles...

Thanks for confirmation guys. I changed the remaining wheels and despite the car looking like it's on stilts (for now), everything seems fine.