Problems with mixing Icelandic and German with LuaLaTex

So what I am trying to do is to use the letter-classic class with LuaLaTeX (This is LuaTeX, Version beta-0.80.0 (MiKTeX 2.9) (rev 5238) (format=lualatex 2015.11.10) 25 NOV 2015 09:30) as included in MikTeX.

It bombs in icelandic.ldf with errors like these:

! String contains an invalid utf-8 sequence.
l.144 DeclareTextCommand{ooob}{T1}{sob {
                                         ó}{.85}{0}{.04}{0}}
A funny symbol that I can't read has just been (re)read.
Just continue, I'll change it to 0xFFFD.

! String contains an invalid utf-8 sequence.
l.145 DeclareTextCommand{OOob}{T1}{sob {
                                         Ó}{.7}{0}{0}{0}}
A funny symbol that I can't read has just been (re)read.
Just continue, I'll change it to 0xFFFD.

! String contains an invalid utf-8 sequence.
l.148 DeclareTextCommand{eeob}{T1}{sob {
                                         é}{1}{0}{.04}{0}}
A funny symbol that I can't read has just been (re)read.
Just continue, I'll change it to 0xFFFD.

! String contains an invalid utf-8 sequence.
l.149 DeclareTextCommand{EEob}{T1}{sob {
                                         É}{1}{0}{.04}{0}}
A funny symbol that I can't read has just been (re)read.
Just continue, I'll change it to 0xFFFD.

! String contains an invalid utf-8 sequence.
l.152 declare@shorthand{icelandic}{"
                                   ó}{ooob}
A funny symbol that I can't read has just been (re)read.
Just continue, I'll change it to 0xFFFD.

! String contains an invalid utf-8 sequence.
<argument> icelandic@sh@string "@string �
                                  ooob @
l.153 declare@shorthand
                      {icelandic}{"Ó}{OOob}
A funny symbol that I can't read has just been (re)read.
Just continue, I'll change it to 0xFFFD.

My minimal working example is this one:

documentclass[english,12pt,a4paper]{letter-classic}
usepackage[T1]{fontenc}
usepackage[icelandic,german,english]{babel}
selectlanguage{english}
newcommand{ISL}[1]{foreignlanguage{icelandic}{#1}}
newcommand{DEU}[1]{foreignlanguage{german}{#1}}
%%usepackage[utf8]{inputenc} % needed with pdfLaTeX, but not with LuaLaTeX (see comment below question)

begin{document}

begin{letter}{Troll family\ISL{Elliðaárdalur}\ISL{999 Reykjavík}\ICELAND}
fromname{DEU{Mäxchen Mustermann}}
fromstreet{DEU{Musterstraße 123}}
fromtown{12345 Musterstadt}
fromphone{+49 123 4567890}
fromtownshort{Musterstadt}
fromsignature{DEU{Mäxchen}}

subject{ISL{Jólasveinar}}
opening{Folks,}

do you know the current address of the ISL{Jólasveinar} and/or their parents ISL{Grýla} and ISL{Leppalúði}?

closing{ISL{Með kveðju,}}
end{letter}

end{document}

The actual document worked without problems until a few months ago, using pdfLaTeX (and still does, see below).

How it looks .

Can anyone explain to me how to mix Icelandic and German using LuaLaTeX with the letter-classic class?

I looked into the KOMA letter class already, but I prefer a slightly more modern/custom look for the letter head, such that at this moment I really want to avoid that one.