Go ahead man. I managed to do that trip on motorcycle last August. Was tough but beautiful. Maybe you will have difficulties with water crossing. Some of them are pretty deep and you have to ford them in the morning when the river level is not so high.
Here you can find short movies from the "swimming with the motorcycle":
www.atryx.cz/Kapro/Brody/CIMG2114.AVI
www.atryx.cz/Kapro/Brody/CIMG2198.AVI
www.atryx.cz/Kapro/Brody/CIMG2199.AVI
www.atryx.cz/Kapro/Brody/CIMG2433.AVI
www.atryx.cz/Kapro/Brody/CIMG2434.AVI
www.atryx.cz/Kapro/Brody/CIMG2436.AVI
www.atryx.cz/Kapro/Brody/CIMG2437.AVI
www.atryx.cz/Kapro/Brody/CIMG2438.AVI
www.atryx.cz/Kapro/Brody/CIMG2442.AVI

Sorry for the quality, it was taken with small digital camera.

Landmanalaugar seemed to me to be most beautiful part of Iceland.
Don't be afraid of roads, we were fast on motorcycles.