I'm not able to replicate your suggestion. The moment I click the paint tool, it automatically re-selects the terrain. I've combed through preferences and the interaction mode panel and tested anything remotely suspicious to help. No success.
With selection interaction mode (1) I assume you mean the "Select Objects" mode. Which wouldn't make a difference regardless, as clicking the terrain painting tool immediately targets the terrain and makes the overlay visible.
Enabling edit selected only on the painting too doesn't make a difference either, as then you have to mark the terrain first. Which brings up the hue as well.
I don't wish to sound harsh, but as an intended feature, it's probably the most counter-intuitive yet. I can't express how strongly I am against the hue, as any and all terrain work in Chronicles of Divinity is at indefinite pause until I find a way to get rid of it.