This post is most of all an answer to a question in the Google Mobile Help Forum. There are limitations when it comes to embedded pictures in that platform so I’ll take it here instead. Who knows, it might find other readers searching the web as well.
To change your keyboard type on a HTC Magic, same on Hero, and as far as I know all devices running the HTC soft keyboard for Android (like my Samsung Galaxy). Note that this is to change between the different stock keyboards, not installing a custom one which is a whole other question.
Start to type a new message, just to get the keyboard up. Then push the little “Settings-button” marked in red on this picture.
This brings you to the keyboard settings (mine is in Swedish but I’ll translate the important parts for you). Select the row marked in red that should be called something like “Keyboard types” in English.
Which brings you to this screen where you just select the input you favor, QWERTY, Compact QWERTY or Phone.
That should be it! Enjoy the keyboard of your choice.
Original question can be found here: http://www.google.com/support/forum/p/Google+Mobile/thread?tid=54e9b7303f968cc0&hl=en