Hiya.

I don't own A7, so this is just a guess. Is your terrain complete, and then a water 'plane' placed somewhere in a depression in order to give you a lake surface? It sounds like you just put a water texture on a part of your terrain. That isn't gonna work. You need to put the water 'block' so that the top of the block is above your terrain. There's a switch for it somewhere. It needs to be "passable", and I'm not sure if you need/should have Polygon set to on...that sounds like it's for collision and shadows.