Setting up wildcard subdomain on ubuntu 14.04 with a2ensite

I am not sure that it is the problem, but the first thing that sticks out is that your are using an IP in your NameVirtualHost setting, and a wildcard in the for the mydomain.com. You probably should use a wildcard for the NameVirtualHost and the default virtual host.

You should be able to get the desired behavior with VirtualDocumentRoot.

Within your <VirtualHost>, add a ServerAlias to catch all the domains you're interested in:

    ServerAlias *.example.com

...then map them to the desired directories. Remove your DocumentRoot, and in its place, add:

    VirtualDocumentRoot /var/www/%1

You'll want to have a <Directory /var/www/> block allowing access, and keep in mind that this vhost should only be handling service for your dynamically configured vhosts - if you want example.com and www.example.com to be handled separately, then you'll want them to have their own <VirtualHost>.

Edit:

You'll want to use a different vhost to handle the "base" domains. Building off of the current config in the comment:

NameVirtualHost *:80
<VirtualHost *:80>
    ServerName catchall.example.com
    ServerAlias *.example.com
    # NOTE: this config will map test1.example.com to /var/www/test1
    VirtualDocumentRoot /var/www/%1
    # If you want that to map instead to /var/www/test1.example.com, then use %0:
    # VirtualDocumentRoot /var/www/%0
    <Directory />
        Options FollowSymLinks
        AllowOverride None
    </Directory>
    <Directory /var/www/>
        Order Allow,Deny
        Allow from all
    </Directory>
    ErrorLog ${APACHE_LOG_DIR}/error.log
    LogLevel warn
    CustomLog ${APACHE_LOG_DIR}/access.log combined
</VirtualHost>
# This next vhost should be in a different file in sites-available to
# fit with debian-style vhosts - but make sure it's alphabetically
# after the file that contains the first vhost - we want it to load first
# so that it's default.  It can also just go in the same file.
<VirtualHost *:80>
    ServerName www.example.com
    ServerAlias example.com
    DocumentRoot /var/www/www.example.com
    <Directory />
        Options FollowSymLinks
        AllowOverride None
    </Directory>
    <Directory /var/www/>
        Order Allow,Deny
        Allow from all
    </Directory>
    ErrorLog ${APACHE_LOG_DIR}/error.log
    LogLevel warn
    CustomLog ${APACHE_LOG_DIR}/access.log combined
</VirtualHost>